Soft copy of case

[SOURJYO DAS]

Mass media news programs have made travelers aware, via hidden video cameras, of how common it is for hotel employees and outsiders posing as hotel guests to gain access to your room and steal your valuables right off the night stand. Of course, by the time you find out something is missing there is no way to figure out who did it. And housekeeping never seems to keep track of who cleaned your room. To combat this problem, most hospitality establishments provide, at a nominal fee, an in-room safe that can only be accessed by the guest and the top manager of the hotel.

Inn-Room Safe is a manufacturer and wholesaler of the most popular and secure in-room safes on the market, the "Interchangeable Lock Block." Inn-Room specializes by manufacturing and distributing only this one product which comes in four different sizes to fit almost all hotel spaces.

Currently, Inn-Room provides shipping credit terms of net 30 days to top qualifying customers and those paying by bank wire transfer. For other, less credit worthy customers, net terms of 10 and 15 days are required. Inn-Room does not allow for a discount for early accounts receivable collections. Recognizing that sales volume should increase and that bad debt expenses should decrease, Inn-Room is considering offering a 2% discount to those hotels who pay for shipments within 10 days.

Today, Inn-Room's average collection period is 23 days. With the proposed discount offering, this number is expected to reduce to 14 days. Bad debt expense is expected to decrease from 0.8% to 0.5%. Inn-Room now sells 1,700 safes on credit at an average price of $234 and a variable cost of $157 per unit. After the discount, Inn-Room forecasts that sales will increase by 7% and that 70% of all credit sales will be by hotels that take the 2% discount. Finally, Inn-Room's required rate of return on a similar risk investment is 12% under both account receivable options.

 

Questions

1.           

If Inn-Room decides to implement the newly proposed discount, what will be the additional profit contribution from an increase in sales?

 

2.           

If Inn-Room decides to implement the newly proposed discount, what will be the cost of the marginal investment in accounts receivable?

 

3.           

If Inn-Room decides to implement the newly proposed discount, what will be the marginal benefit of reducing the bad debt expense?

 

4.           

If Inn-Room decides to implement the newly proposed discount, what will be the marginal cost of paying the cash discount to early paying customers?

 

5.           

If Inn-Room decides to implement the newly proposed discount, what will be the net profit from implementing the proposed plan?

 

6.           

What additional factors should Inn-Room consider when making such an important decision?