Reference no: EM132766920

Market Lane Inc. is reviewing its credit policy. Presently, the company offers terms of 1/10, net 30. This policy results in monthlysales of 150,000 units at $10 each, of which 10% are cash sales. Cash sales are entitled to the discount. For those sales made on account, 25% qualify for the discount and are paid within 10 days. The balance of sales are paid on the 30th day. Bad debts amount to 2% of credit sales and variable costs of production are $7 per unit.

The new policy being proposed would offer 2/10, net 60. It is expected that this policy would result in credit sales of an additional 15,000 units per month. Cash sales are expected to remain at 15,000 units per month. For those sales made on account, 45% are expected to be paid within the discount period and the balance, except for bad debts will be paid on the 60th day. Bad debts are expected to increase to 3% of credit sales if the new policy is adopted. An additional $50,000 investment in inventory will be required.

Working capital is financed at the bank at 12%. The company's tax rate is 40%.

REQUIRED:

Should the company change its credit policy? Support your recommendation with calculations.