3. Accounts Receivable Policy Saxaphone Ltd has annual credit sales of $87 million and 4 percent of the value of these sales have to be written off as bad debt. Currently Saxaphone's credit terms are 4/15 net 30; and 40 percent of the non-defaulting credit customers take advantage of the discount. A further 40 percent of non- defaulters pay on time and the remaining 20 percent of non-defaulters pay 15 days late. Saxaphone Ltd is considering changing its credit terms to 2/10, net 30 with a tightening of credit policy. It is expected that 25 percent of non-defaulting credit customers will take advantage of the changed discount, but that the percentage of non-defaulting customers paying on time without collecting the discount will rise to 70 while 5 percent will now pay 15 days late. The change should decrease credit sales to $85 million per year, but it is also expected to decrease bad debts to 2 per cent of this total credit sales figure. The existing administrative cost of pursuing slow payers is expected to increase from the existing $200,000 to $300,000. Saxaphone's opportunity cost of funds is 10 percent, its variable cost ratio is 70% and its average tax rate is 28 percent. Where appropriate, use a 360-day year. Required: (a) Calculate the days sales outstanding (DSO) for the old and new policies (4 marks) (6) Calculate the discount expense for the old and new policies (2 marks) c) Calculate the cost of carrying accounts receivable for both policies (3 marks) (d) Calculate the bad debt losses for the old and new policies (2 marks) (e) Calculate the percentage change in forecasted profit that shifting from the old to the new policy will bring about. (Please be accurate to these decimal places: xx.xx% or 0.xxxx) (3 marks) (1) Keeping the values of all other variables unchanged from your calculation in part (e), what would be the percentage change in forecasted profit from the old policy, if everything in the new policy was adopted but for one item. This item is the change in collection expenses. Instead of $300,000, let the new collection expense that is adopted be $400,000 (2 marks) The Doubling of collection expenses to $400,000 will impact other figures stated in the proposed new policy (which were based, where relevant, on a rise in collection expenses to $300,000 only). Please name two variables that are impacted, suggest a likely new value for each, and explain how, in words, they would impact the percentage change between the old policy and the new policy. [NOTE: No computations are required in this question] (4 marks) Total: 20 Marks