Explain why should the change in credit terms be made

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Reference no: EM13334624

Rramsey tires sells on credit terms of net 45 days, whereas the rest of the industry sells on terms of net 30 days. On annual credit sales of $6 million, Ramsey currently averages 52 days sales in accounts receivable. The company's CFO estimates that tightening the credit terms to net 30 days would reduce annual sales to $5.8 million, but accounts receivable would drop to 35 days of sales, and the savings on investment in them should more than overcome any loss in profit. Ramsey's varaible cost ratio is 80.

If the interest rate on funds invested in receivables is 8 percent, should the change in credit terms be made?

All operating cost are paid when inventory is sold. Bad debts and collection cost will not change.

Reference no: EM13334624

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