2. Changing the credit period

Making changes to a firms 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 firms cash discount? Check all that apply.

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

B. An increase in the creditworthiness of the firms customers

C. A decrease in the creditworthiness of the firms 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, VHCs 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 VHCs average receivables balance? ___226027/154109/206479___?
	B. How much cost savings is generated by the reduction in the receivables investment? ___24657/27123/18493___?
	C. How much in cash discounts will be sacrificed by VHC? __2250/3000/3300_____?
	D. What is the net change in VHCs pretax earnings? ___23823/16243/21657_____?
	E. Should the company make the change to its credit policy? _______?