Credit sales on the basis of its net 20 credit policy

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Reference no: EM131928819

1. Framing Inc. is considering changing its credit policy from “2/20 net 50” to “3/20 net 60”. The firm expects the policy change to increase sales 30% over the current $12 million level. Framing also expects the percentage of customers taking advantage of the discount to increase from 20% to 65% and the bad-debt loss ratio will increase from 3.7% to 4.2%. Framing expects the average collection period to decrease from 58 days to 52 days. Its variable cost ratio is 87% and its required return on A/R investments is 15%. Should Framing adopt the new policy?

a) Yes, the difference between marginal benefits and marginal costs is $468,000

b) No, the difference between marginal benefits and marginal costs is ($315,016)

c) Yes, the difference between marginal benefits and marginal costs is $256,800

d) No, the difference between marginal benefits and marginal costs is ($46,743)

2. Wilshire Products generates $30 million in credit sales on the basis of its “net 20” credit policy. In an effort to increase market share, the firm is considering changing to a “net 30” credit policy. Wilshire expects the shift will result in a $5 million increase in credit sales, and an increase in its average collection period from 32 days to 47 days. Wilshire also expects its bad-debt losses to increase from the current 3% level to a new 4% level. Wilshire’s profit ratio is 15% and its required return on A/R is 14%. Should Wilshire lengthen its credit period?

a) Yes, the difference between marginal benefits and marginal costs is $250,000

b) No, the difference between marginal benefits and marginal costs is ($12,740)

c) Yes, the difference between marginal benefits and marginal costs is $512,740

d) No, the difference between marginal benefits and marginal costs is ($55,430)

Reference no: EM131928819

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