Reference no: EM132997075

Question - Dyson is considering changing the credit term for its customers and relaxing its credit policy in hope of attracting more customers. Dyson's annual sales is $11 million and the current credit term is 1/20, net 30. Right now, 5% of the customer paid by cash, 25% of the customer paid in Day 20, 70% of the customer paid in Day 30. Dyson wants to change the credit term to 3/20, net 50. It believes the relaxed credit policy will attract more customers and increase annual sales by 10%. Under the new policy, 5% of the customer will still pay by cash, 10% of the customer will pay in Day 20, 65% of the customer will pay in Day 50 and the rest of the customers will pay later in Day 60. Along with relaxing the payment terms, Dyson is also relaxing its effort to chase after their customers for late payment. As a result, they can eliminate the whole collection department whose annual operating cost is $100,000. Bad debt is currently sitting at 1% of credit sales and Dyson estimates that bad debt will increase to 5% of credit sales under the new policy. Dyson's profit margin is 42% and it has a line of credit with the bank charging an interest rate of 10%. Should Dyson change its credit policy?