Reference no: EM132704886

Unscripted Company is considering changing its credit terms from 2.5/15, net 30 to 3/10, net 30, in order to speed up the collections. At present 40% of Unscripted Company's customer take the 2.5% discount. Under the new terms, discount customers are expected to rise to 50%. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation od credit standards; therefore, bad debt losses are not expected to rise above their present 2.5% level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6million per year. Unscripted variable cost ratio is 75%, the interest rate on funds invested in accounts receivable is 9%, and the firm's corporate tax rate is 35%.

Required:

Question a. What is the day's sales outstanding before and after the change?

Question b. Calculate the discount cost before and after the change

Question c. Calculate the peso cost of carrying receivables before and after the change.

Question d. Calculate the bad debt losses before and after the change

Question e. What is the incremental profit from the change in credit terms?

Question f. Should Unscripted change its credit terms?