ANALYZING PROPOSED CHANGES IN CREDIT POLICY

Widget Manufacturing Company's current credit terms are 1/10, net 30. Widget is considering changing its terms to 2/10, net 40, relaxing its credit standards, and putting less pressure on slow-paying customers. Data for the existing credit policy is appended below along with Management's forecasted expectations for new policy changes. Based on the information provided, complete the cost of carrying receivables for both the current and new credit policy.

Opportunity cost = (Old sales/365)(DSO)(1 - V)(r) = $182

Please show calculation by cell or numbers, will rate. Thank you.

A G J K L N Current New Policy Policy $410,000 $550,000 9 Annual sales = 10 Discount= 1% 2% 11 % customers who take discount 60% 50% 12 % customers who pay on day % customers who pay on day 10 50% 60% 13 30 40% 0% 14 % customers who pay on day 40 10% 20% 15 % customers who pay on day Variable cost ratio 50 0% 20% 16 55% 55% 17 Cost of funds = 12% 12% 18 Bad debt percent = 2.6% 6.1% 19 Credit analysis and collections expenses $6,000 $4,000 20 21 Current DSO = 21 24 22 $2,050 $6,600 Current discounts 23 Cost of carrying= (DSO)(Sales per day)(VC ratio)(Cost of funds) Cost of carrying = Bad debt losses = 24 25 $10,660 $33,550 26 C E F G Complete the missing information for the Net Income Statement below: 35 36 Projected Effect of 2016 Net Projected 2016 Credit Income Policy Under New Net Income Under Current Change (2) Credit Credit Policy (1) Policy (3) 37 Gross sales 38 $2,050 $4,550 $6,600 Less discounts 39 Net sales 40 Production costs, including OH 41 $0 $0 $0 Profit before credit costs and taxes 42 Credit related costs: 43 Cost of carrying receivables 44 Credit analysis and collection expenses 45 Bad debt losses 46 Profit before taxes $0 $0 $0 47 Taxes (25%) $0 $0 $0 48 Net Income 49 I A G J K L N Current New Policy Policy $410,000 $550,000 9 Annual sales = 10 Discount= 1% 2% 11 % customers who take discount 60% 50% 12 % customers who pay on day % customers who pay on day 10 50% 60% 13 30 40% 0% 14 % customers who pay on day 40 10% 20% 15 % customers who pay on day Variable cost ratio 50 0% 20% 16 55% 55% 17 Cost of funds = 12% 12% 18 Bad debt percent = 2.6% 6.1% 19 Credit analysis and collections expenses $6,000 $4,000 20 21 Current DSO = 21 24 22 $2,050 $6,600 Current discounts 23 Cost of carrying= (DSO)(Sales per day)(VC ratio)(Cost of funds) Cost of carrying = Bad debt losses = 24 25 $10,660 $33,550 26 C E F G Complete the missing information for the Net Income Statement below: 35 36 Projected Effect of 2016 Net Projected 2016 Credit Income Policy Under New Net Income Under Current Change (2) Credit Credit Policy (1) Policy (3) 37 Gross sales 38 $2,050 $4,550 $6,600 Less discounts 39 Net sales 40 Production costs, including OH 41 $0 $0 $0 Profit before credit costs and taxes 42 Credit related costs: 43 Cost of carrying receivables 44 Credit analysis and collection expenses 45 Bad debt losses 46 Profit before taxes $0 $0 $0 47 Taxes (25%) $0 $0 $0 48 Net Income 49