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Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to change its credit policy. Terms are currently 2/10, net 60 and would be changed to net 30. Currently, 60% of the customers on average pay at the end of the credit period (60 days) and the remaining customers would pay in 10 days to take advantage of the discount. Under the new policy, it is anticipated that customers will pay on average in 35 days and 50% of the customers will pay in 10 days to take advantage of the discount. All sales are credit sales and will remain so with the change of policy. Average annual sales of $8,000,000 a year are expected to fall to $6,000,000. Bad debt losses will drop from 3% of total sales to 2% of total sales. Variable production costs will remain at 80%. The opportunity cost of financing is 8%. The change in contribution margin is: O$4,000,000 ($400,000) $2,000,000 O$1,600,000 The change in bad debt is: O$120,000 ($120,000) $240,000 ($120,000) The change in discount expense is: ($64,000) ($60,000) ($4,000) $ O$4,000 A/R before the policy change is: 923,260 876,712 543,629 0897,326 A/R after the policy change is: 0889,260 O575,342 0543,629 0832,326 The opportunity cost of A/R at 8% is: $24,110 O($24,110) 0876,712 $310,370 Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to change its credit policy. Terms are currently 2/10, net 60 and would be changed to net 30. Currently, 60% of the customers on average pay at the end of the credit period (60 days) and the remaining customers would pay in 10 days to take advantage of the discount. Under the new policy, it is anticipated that customers will pay on average in 35 days and 50% of the customers will pay in 10 days to take advantage of the discount. All sales are credit sales and will remain so with the change of policy. Average annual sales of $8,000,000 a year are expected to fall to $6,000,000. Bad debt losses will drop from 3% of total sales to 2% of total sales. Variable production costs will remain at 80%. The opportunity cost of financing is 8%. The change in contribution margin is: O$4,000,000 ($400,000) $2,000,000 O$1,600,000 The change in bad debt is: O$120,000 ($120,000) $240,000 ($120,000) The change in discount expense is: ($64,000) ($60,000) ($4,000) $ O$4,000 A/R before the policy change is: 923,260 876,712 543,629 0897,326 A/R after the policy change is: 0889,260 O575,342 0543,629 0832,326 The opportunity cost of A/R at 8% is: $24,110 O($24,110) 0876,712 $310,370