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Unformatted text preview: The brothers believe that the discount would both attract additional customers and encourage some existing customers to purchase more from the firm--after all, the discount amounts to a price reduction. Of course, these customers would take the discount and, hence, would pay in only 10 days. The net expected result is for sales to increase to $1,100,000; for 60 percent of the paying customers to take the discount and pay on the 10th day; for 30 percent to pay the full amount on day 20; for 10 percent to pay late on day 30; and for bad debt losses to fall from 2 percent to 1 percent of gross sales. The firm's operating cost ratio will remain unchanged at 75 percent, and its cost of carrying receivables will remain unchanged at 12 percent. To begin the analysis, describe the four variables that make up a firm's credit policy, and explain how each of them affects sales and collections. Then use the information given in part H to answer parts I through N....
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- Spring '08