Lewis lumber is considering changing its credit terms

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Reference no: EM133638002

Question

Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $468,000, and the average collection period (DSO) is 56 days. Lewis estimates tightening the credit terms will reduce annual sales to $464,000, but accounts receivable would drop to 38 days of sales. Lewis' variable cost ratio is 65 percent and its average cost of funds is 9 percent. Should the change in credit terms be made? Assume all operating costs are paid at the time inventory is sold and all sales are collected at the DSO. Assume there are 360 days in a year. Do not round intermediate calculations. Round your answers to the nearest cent. The NPV for the existing credit policy, that is $ ? , is lower than the NPV for the proposed credit policy, that is $ ? Thus, Lewis Lumber should change its credit policy.

Reference no: EM133638002

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