Should the firm increase credit period

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A firm is contemplating an extension of its credit terms from net 15 to net 60. Currently, the firm sells 500,000 units per year at a price of $1.20 per unit and bad-debts expense is $20,000.

Problem 1: 10% of the firm's sales are for cash. The average cost per unit is $0.85. The credit period extension is expected to increase credit sales by 12%, and increase bad-debts expense to $30,500. The marginal cost per unit is $0.75. If the firm's tax rate is 45 percent, and its required minimum rate of return on investments in accounts receivable is 8% after-tax, should the firm increase its credit period?

Reference no: EM132792931

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