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Unformatted text preview: Tim Gillespie FIN 440 Week 4 Homework 22-7 Current New Terms 90 30 Sales 2500000 2375000 Collection Period 95 35 Variable Cost Ratio 85% 85% Interest Rate 18% 18% Tax Rate 40% 40% Current Proposed Incremental savings Amount in Receivables $650,685 $227,740 Cost of receivables $117,123 $40,993 $76,130 Contribution Margin $375,000 $356,250 ($18,750) Net Benefits Before Tax $57,380 Net Benefits After Tax $34,428 Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry wide credit terms have recently been lowered to net 30 days. On annual credit sales of $2.5 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to $2,375,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit. Vinson’s variable cost ratio is 85 percent, and taxes are 40 percent. If the interest rate on funds invested in receivables is 18 percent, should the change in credit any loss in profit....
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This note was uploaded on 02/25/2012 for the course FINANCE 440 taught by Professor Jones during the Spring '12 term at Regis University.
- Spring '12