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ABC Inc. is proposing a change in its credit policy to increase sales of Product XYZ Existing terms is 1/10, net 30 New terms is
ABC Inc. is proposing a change in its credit policy to increase sales of Product XYZ Existing terms is 1/10, net 30 New terms is 2/20, net 40 26 New sales level (all credit sales) $ 24,000,000 Original sales level (all credit sales) $ 20,000,000 Contribution Margin ration 30% % bad debt losses on new sales level 5% % bad debt losses on original sales level 2% New average collection period (days) Original average collection period (days) 15 Cost of Capital 10% Cost of Goods sold as a percentage of sales 60% ABC also anticipates to have keep additional inventory. The inventory turnover rate would improve with new sales. Inventory turnover on new sales level 10 Inventory turnover on original sales level Financing cost for Working Capital is 10% Tax rate 40% Current Liabilities for XYZ zero dollars Before credit policy changes, 75% of the customers takes the early payment discount. Anticipate only 70% of the customers would take the discount after the change. What is net annual benefit of changing to the new credit policy? o 5
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