Reference no: EM132581921

In an effort to boost sales, the credit department at hair and beauty , a wholesaler of specialty imported hair products, has approved credit sales to salons that have not had a long operating history. hair and beauty has enjoyed an impressive growth in revenue to $500 million. However, bad debt expense has increased from 4% to 6% of sales. Hair and beauty knows that not all the new salons will survive, but as the competition diminishes, the few remaining shops will have a dominant market share and will be profitable. The finance department would like to adopt a new credit policy which would reduce credit sales, resulting in an overall sales reduction of 8%, but a decrease in bad debt expense to 2.5% of sales. The company has an operating profit margin of 35%, before bad debt expense and other costs associated with the credit policy. If it adopts the stricter credit policy, the company's average collection period would decrease from 50 days to 40 days. The company's financing rate of 6% will remain the same. Implementing the new credit policy would require $600,000 in additional annual overhead costs.

Question 1: What is EBT now with the existing credit policy?

Question 2: What will EBT be with the new credit policy?

Question 3: Suggest 2 other factors that the company should consider?