Solution-Relaxing its credit terms from the current terms

Relaxing its credit terms from the current terms

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Reference no: EM131234382

ABC is considering relaxing its credit terms from the current terms of net 30 to 3/30 net 60. The following information will help you to evaluate the proposal. Show ABC proceeds with the change. Show all relevant calculations.

New Sales level (all credits)	$ 9 000 000
Original Sales level (all credits)	$ 8 000 000
Contribution Margin	25%
Percentage bad debts losses on new sales	6%
New average collection period	45 days
Original average collection period	30 days
Additional investment inventory	$ 25 000
Pretax required rate of return	15%
New percentage cash discount	3%
Percentage of customers taking cash discount	50%

Reference no: EM131234382

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Relaxing its credit terms from the current terms

Reference no: EM131234382

Reference no: EM131234382

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