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#3. Ewing Electronics Company (EEC) currently has sales of $800,000, and its days sales outstanding is 20 days. The financial manager estimates that offering longer
#3. Ewing Electronics Company (EEC) currently has sales of $800,000, and its days sales outstanding is 20 days. The financial manager estimates that offering longer credit terms would (1) increase the days sales outstanding to 40 days and (2) increase sales to $1,100,000. However, bad debt losses, which were 1 percent on the old sales, would amount to 3 percent on the incremental sales only (bad debts on the old sales would stay at 1 percent). Variable costs are 75 percent of sales, and EEC has a 12 percent receivables financing cost. What would the annual incremental pre-tax profit be if EEC extended its credit period? Assume a 365-day year. (10 points)
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