Credit Policy Change - A company's current credit terms are...

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Current Policy Annual sales (in millions) = $1,000,000 Discount = 1% % who pay on day 10 = 39.20% % who pay on day 30 = 39.20% % who pay on day 40 = 9.80% % who pay on day 60 = 9.80% % Bad debts; written off 60 = 2.0% Variable cost ratio = 65% Cost of funds = 10% Credit analysis and collections expenses = $5 Current DSO = 26.68 Current discounts (in millions) = $3,920 Cost of carrying (in millions) = (DSO)(Sales per day)(VC ratio)(Cost of funds) $4,817.2 Bad debt losses = $20,000.0 Impact on Net Income Analysis Projected Profits, Current Policy Gross sales $1,000,000 $400,000 Less discounts $3,920 $12,376 Net sales $996,080 $387,624 Production costs, including OH $650,000 $260,000 Profit before credit costs and taxes $346,080 $127,624 Credit related costs: Cost of carrying receivables $4,817 $1,768 Credit analysis and collection expenses $5 ($3) Bad debt losses $20,000 $22,000 Profit before taxes $321,258 $103,859 State-plus-federal taxes (40%) $128,503 $41,544 A company's current credit terms are 1/10, net 30, but management
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This note was uploaded on 09/08/2010 for the course BUS 173A at San Jose State University .

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Credit Policy Change - A company's current credit terms are...

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