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18

Having evaluated its inventory management system your company is considering changing its terms of trade to

encourage more potential customers to do business with your company, rather than your competitors. Until now

its terms of trade have been strictly cash-only. You have been asked to look at the value of offering terms of 1/20

Net 60 EOM. Your company currently turns over 5,200 units of inventory per annum at a selling price of $1,000

per unit and variable operating costs of $500 per unit. Your research indicates that this change in credit terms will

likely result in a 20% increase in sales and that all customers will take the extended credit terms rather than pay

early, resulting in an average collection period of 60 days. Unfortunately the resultant increase in account

receivables may also result in bad-debts equal to 10% of the annual average account receivables balance. Your

company's opportunity cost is 20%.