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case study answer 1 answer below » Caselet 2This case has been framed in order to test the skills in evaluating a credit request and reaching acorrect decision. Perluence International is large manufacturer of petroleum and rubber-basedproducts used in a variety of commercial applications in the fields of transportation, electronics, andheavy manufacturing. In the northwestern United States, many of the Perluence products aremarketed by a wholly-owned subsidiary, Bajaj Electronics Company. Operating from a headquartersand warehouse facility in San Antonio, Strand Electronics has 950 employees and handles a volumeof $85 million View complete question » Caselet 2This case has been framed in order to test the skills in evaluating a credit request and reaching acorrect decision. Perluence International is large manufacturer of petroleum and rubber-basedproducts used in a variety of commercial applications in the fields of transportation, electronics, andheavy manufacturing. In the northwestern United States, many of the Perluence products aremarketed by a wholly-owned subsidiary, Bajaj Electronics Company. Operating from a headquartersand warehouse facility in San Antonio, Strand Electronics has 950 employees and handles a volumeof $85 million in sales annually. About $6 million of the sales represents items manufactured byPerluence. Gupta is the credit manager at Bajaj electronics. He supervises five employees who handlecredit application and collections on 4,600 accounts. The accounts range in size from $120 to$85,000. The firm sells on varied terms, with 2/10, net 30 mostly. Sales fluctuate seasonally and theaverage collection period tends to run 40 days. Bad-debt losses are less than 0.6 per cent of sales.Gupta is evaluating a credit application from Booth Plastics, Inc., a wholesale supply dealer servingthe oil industry. The company was founded in 1977 by Neck A. Booth and has grown steadily sincethat time. Bajaj Electronics is not selling any products to Booth Plastics and had no previous contactwith Neck Booth. Bajaj Electronics purchased goods from Perluence International under the sameterms and conditions as Perluence used when it sold to independent customers. Although BajajElectronics generally followed Perluence in setting its prices, the subsidiary operated independentlyand could adjust price levels to meet its own marketing strategies. The Perluence’s cost-accountingdepartment estimated a 24 per cent markup as the average for items sold to Pucca Electronics. BajajElectronics, in turn, resold the items to yield a 17 per cent markup. It appeared that these percentageswould hold on any sales to Booth Plastics. Bajaj Electronics incurred out-of pocket expenses thatwere not considered in calculating the 17 per cent markup on its items. For example, the contact withBooth Plastics had been made by James, the salesman who handled the Glaveston area. James wouldreceive a 3 per cent commission on all sales made Booth Plastics, a commission that would be paidwhether or not the receivable was collected. James would, of course, be willing to assist in collectingany accounts that he had sold. In addition to the sales commission, the company would incur variablecosts as a result of handling the merchandise for the new account. As a general guideline,warehousing and other administrative variable costs would run 3 per cent sales. Gupta Holmsteadapproached all credit decisions in basically the same manner. First of all, he considered the potentialprofit from the account. James had estimated first-year sales to Booth Plastics of $65,000. Assumingthat Neck Booth took the, 3 per cent discount. Bajaj Electronics would realize a 17 per cent markupon these sales since the average markup was calculated on the basis of the customer taking thediscount. If Neck Booth did not take the discount, the markup would be slightly higher, as would thecost of financing the receivable for the additional period of time. In addition to the pote…
