Lumber
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In order to remain solvent, Clarkson Lumber must borrow money from the bank to decrease the cost of financing its purchases. Borrowing money from the bank to take advantage of the trade discount is just the first step Clarkson must take. Details of the other recommended steps are explained in the analysis of issue two.
ANALYSIS OF ISSUE 2:
On first blush, Clarkson Lumber should take the two percent discount from their suppliers, however, at this point, they cannot afford it. By taking the cash discount they will be required to borrow more money than the company can sufficiently pay back. Thus, they should not take the discount. Clarkson’s profitability, accounts receivable, days sales outstanding, inventory turnover and accounts payable all play an important role in making this decision and are as follows:
amount of $69,000 which reduces Clarkson’s expenses by a projected $40,000 (see Exhibit 5). In terms of profitability, it appears that Clarkson Lumber will be more profitable if they secure an additional loan from the bank and take the cash discount from their suppliers. This profitability overall would result in a Net Income increase of $23,000.
Summary:
Clarkson Lumber needs more credit than they have. In addition, they are limited to taking a loan of $750,000. If the company goes over this amount, “restrictions on additional borrowing would be imposed” (