Reference no: EM132806342

Question - Gemini Co does not currently extend credit to their customers. They manufacture drum sets and sell them to specialty retailers in Canada. Last year the company sold 600 drum sets at a price of $380.00 per drum set.

The company is considering offering new credit terms of net 30 days to all customers to drive sales. They believe the competitive advantage this new policy would provide would allow Gemini Co to increase the selling price of their product by $10.00 per unit and increasing sales by 90 units per year. Variable costs are expected to remain at $310.00 per unit and bad debt expense will be $4,000 per year. (Note the wording here. Total Contribution Margin will go up for two reasons. First, there will be a price increase on the existing 600 drum sets being sold. Second; there will be an additional 90 drum sets sold at the new price. Perform your analysis on total sales and total contribution margin, not just the change in sales volume.)

Gemini Co expects that all customers will take advantage of the new terms (i.e., they will all pay Gemini Co 30 days after a sale is recorded). So, for the first time in the company's history they will have an accounts receivable balance in current assets and a bad-debt expense. The increase in sales will also mean an increase in the inventory they hold. Inventory is currently sitting at $513,000 and is expected to increase by 20 percent. The firm will finance the additional investment in working capital by using a line of credit (bank loan) which charges 10 percent interest per year.

Required - Calculate the increase in current assets and the costs to finance that increase.