ABC Inc. has a credit term of net 30. It is considering changing to term net 60. It is estimated that the change will increase annual sales from P2 million to P2.5 million. The additional cost to support the increase in sales is P320,000. The average collection period is estimated to increase from 70 days to 90 days. The cost of financing receivables is 12.5% per year. Assume 360 days per year.

What is the additional investment in receivables? What is the cost of financing receivables? What is profit (or loss) from increased sales?

Should ABC Inc. proceed in changing its credit term from net 30 to net 60? Why? SHOW COMPLETE SOLUTION AND EXPLANATION.