2. Changing the credit period

Making changes to a firm's credit policy involves trade-offs. Assuming that all other factors remain constant, which of the following are outcomes expected to result from an increase in a firm's cash discount?Check all that apply.

A. An increase in the firm's credit sales, a speeding up of customer payments, and a reduction in the firm's receivables investment

B. An increase in the creditworthiness of the firm's customers

C. A decrease in the creditworthiness of the firm's customers

D. An increase in the cost of the discounts given

Virginia Hydroponics Company (VHC), a wholesaler of seeds and plant nursery products, currently sells on terms of net 45 to its customers but is experiencing a days sales outstanding (DSO) of 105 days. In an effort to reduce this delay, VHC's management is considering implementing its first cash discount. The revised credit terms, 1/25 net 45, are expected to reduce its DSO to 75 days. VHC expects 12% of its customers to take the discount, but it does not expect its inventory level to change as a result of the policy change.

VHC has annual sales of $2,500,000 and incurs variable costs of 65%. Sales and the level of variable costs are not expected to change with the alteration in credit policy. VHC wants to earn a pretax return of 12% on its receivables investment. Given this data, answer the following questions. (Note: Use 365 days as the length of a year. Do not round intermediate calculations. Round all final answers to the nearest dollar.)

A. What is the expected incremental change in VHC's average receivables balance?

B. How much cost savings is generated by the reduction in the receivables investment?

C. How much in cash discounts will be sacrificed by VHC?

D. What is the net change in VHC's pretax earnings?

E. Should the company make the change to its credit policy?