Apollo Inc does not currently extend credit to their customers. They manufacture guitars and sell them to specialty retailers in Canada. Last year the company sold 800 guitars at a price of $400.00 per guitar.

The company is considering offering new credit terms of net 40 days to all customers to drive sales. They believe the competitive advantage this new policy would provide would allow Apollo Inc to increase the selling price of their product by $12.00 per unit and increasing sales by 120 units per year. Variable costs are expected to remain at $300.00 per unit and bad debt expense will be $6,000 per year. (Note the wording here. Total Contribution Margin will go up for two reasons. First, there will be a price increase on the existing 800 guitars being sold. Second; there will be an additional 120 guitars sold at the new price. Perform your analysis on total sales and total contribution margin, not just the change in sales volume.)

Apollo Inc expects that all customers will take advantage of the new terms (i.e., they will all pay Apollo Inc 40 days after a sale is recorded). So, for the first time in the company's history they will have an accounts receivable balance in current assets and a bad-debt expense. The increase in sales will also mean an increase in the inventory they hold. Inventory is currently sitting at $477,000 and is expected to increase by 15 percent. The firm will finance the additional investment in working capital by using a line of credit (bank loan) which charges 7 percent interest per year.

Required:

1. Calculate the increase in current assets and the costs to finance that increase: (enter all numbers as whole numbers)

   Description (enter all numbers as positive)	New	Old	Difference
   Accounts receivable	$	N/A
   Inventory
   Current assets	$	$	$
   Bank interest costs			$

1. Calculate the impact of changing the credit policy on contribution margin:

   Description (enter all numbers as positive)	New	Old	Difference
   Sales	$	$
   Variable Exp
   Contribution Margin	$	$	$

1. Calculate the net impact of changing the credit policy:

   Description	Impact
   Increase in contribution margin (enter as a positive number)	$
   Increase in bad debts (enter as a negative number)
   Bank interest cost (enter as a negative number)
   Net change (enter as a negative number if the amount is less than zero)	$

1. Would you offer the new credit terms? (Click to select) Yes No