A firm collects 60 percent of its monthly sales immediately and the rest a month later; its production costs are 80 percent of sales, and it holds two months of sales in inventory. It pays 40 percent of its bills immediately and the remainder after 30 days.
a. What is its break-even sales growth rate?
b. What happens to this rate if it increases its inventory to three months’ sales and offers more lenient credit terms that result in only 40 percent of its sales being for cash, with the remainder being collected after 30 days?