A company is thinking about changing its credit policy to speed up its cash collections. The present policy calls for a 1/10, net 30 cash discount. The new policy would call for a 5/10, net 50 cash discount. Currently, 35% of its customers are taking the discount, and it is anticipated that this number would go up to 53% with the new discount policy. It is further anticipated that annual sales would increase from a level of $481k to $656k as a result of the change in the cash discount policy. The average inventory carried by the firm is based on an economic order quantity (EOQ). Assume that unit sales increase from 16 to 23.6k. The ordering cost per order is $200 and the carrying cost per unit is $1.24 (these values will not change with the fulfillment of the new discount policy). Each unit in inventory has an average cost of $10. The cost of goods sold equates to 65% of net sales, general and administrative expenses represent 20% of net sales, and interest payments of 14% will only be necessary for the increase in the accounts receivable and inventory balances. The firm is in a 38% tax bracket Required: Calculate the percentage change in earnings after taxes (EAT) between the current discount policy and the new discount policy. Use a 360-day year. Note: The term "k" is used to represent thousands (* $1.000). Further Information: By the end of this problem, you are required to establish the percentage difference in EAT between the old policy (.e. before the proposed discount) and the new policy (i.e. after the proposed discount). In other words: Required: Calculate the percentage change in earnings after taxes (EAT) between the current discount policy and the new discount policy. Use a 360-day year. Note: The term "k" is used to represent thousands (X $1,000). Further Information: By the end of this problem, you are required to establish the percentage difference in EAT between the old policy (i.e. before the proposed discount) and the new policy (i.e. after the proposed discount). In other words: %AEAT = (EATnew - EATold) + EAT old Therefore, you proceed with calculating EAT for each discount policy as you normally would under the income statement framework. Remember that net sales - $ sales - $ discount Moreover, interest expense = $0 when calculating EAT for the old policy [i.e.EBIT = EBT). When calculating EAT under the new policy: $int. exp. = (increase in acc. rec. + increase in inv.) * interest %. The difference in receivables = acc.rec. after the proposed discount - acc. rec. before the proposed discount. This means that for each discount policy, you must multiply the avg collection period x avg daily net sales. Similarly, the $ difference in inventory - $ inv. after the proposed discount - $ inv. before the proposed discount. Accordingly, you must divide EOQ + 2 then multiply the outcome the $ avg inventory cost per unit for both discount policy frameworks
