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Relaxing its credit terms from the current terms

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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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