Happy Trail Adventure Products is reevaluating its credit policy. Current terms are 2/10, net 30, resulting in annual sales of 400,000 units. Cash sales that qualify for the discount account for 10 percent of sales, 65 percent qualify for the discount by paying on the lOth day, and the other 25 percent pay, on average, in 40 days. Unit sales price is $24.00 and variable production costs are $21.00 per unit. Bad debts are 1.5 percent of credit sales.
The new policy of 2/10, net 60 is expected to increase sales by 12 percent annually.
Cash sales are expected to remain at 10 percent of sales, but those qualifying for the discount by paying in 10 days would drop to 25 percent; the other 65 percent would, on average, pay in 70 days. It is expected that variable production costs would remain at $21.00 per unit but that bad debt expense would increase to 2 percent of credit sales. Happy Trail's banker would continue to finance working capital requirements at 13 percent. Should the new policy be implemented?