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 Current Policy $410,000 1% 50% New Policy $550,000 2% Annual sales - Discount- % customers who take discount- % customers who pay on day % customers who pay on day % customers who pay on day 96 customers who pay on day Variable cost ratio Cost of funds- Bad debt percent- Credit analysis and collections expenses- 60% 0% 20% 20% 55% 12% 6.1% $4,000 30 40 50 10% 55% 12% 2.6% $6,000 Current DSO- Current discounts Cost of carrying (DSO(Sales per day)(VC ratio)(Cost of funds) Cost of carrying Bad debt losses 21 $2,050 $6,600 $10,660 $33,550 Since the DSO increases the firm will receive the cash from profits on sales later. This is an opportunity cost since the firmm doesn't have the cash from profits to make investments. Opportunity cost (Old sales/365)(ADSO)(1 - V)(r) Widget Manufacturing Company: Analysis of Changing Credit Policy $182 Complete the missing information for the Net Income Statement below: 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 Current Policy $410,000 1% 50% New Policy $550,000 2% Annual sales - Discount- % customers who take discount- % customers who pay on day % customers who pay on day % customers who pay on day 96 customers who pay on day Variable cost ratio Cost of funds- Bad debt percent- Credit analysis and collections expenses- 60% 0% 20% 20% 55% 12% 6.1% $4,000 30 40 50 10% 55% 12% 2.6% $6,000 Current DSO- Current discounts Cost of carrying (DSO(Sales per day)(VC ratio)(Cost of funds) Cost of carrying Bad debt losses 21 $2,050 $6,600 $10,660 $33,550 Since the DSO increases the firm will receive the cash from profits on sales later. This is an opportunity cost since the firmm doesn't have the cash from profits to make investments. Opportunity cost (Old sales/365)(ADSO)(1 - V)(r) Widget Manufacturing Company: Analysis of Changing Credit Policy $182 Complete the missing information for the Net Income Statement below
