Assignment 2 - Problem 2 ABC Inc. is proposing a change in its credit policy to increase sales of Product XYZ Existing terms is 1/10, net 30 New terms is 2/20, net 40 $ $ New sales level (all credit sales) Original sales level (all credit sales) Contribution Margin ration % bad debt losses on new sales level % bad debt losses on original sales level New average collection period (days) Original average collection period (days) Cost of Capital Cost of Goods sold as a percentage of sales 24,000,000 20,000,000 30% 5% 2% 26 15 10% 60% ABC also anticipates to have keep additional inventory. The inventory turnover rate would improve with new sales. Inventory turnover on new sales level Inventory turnover on original sales level 10 5 Financing cost for Working Capital is Tax rate Current Liabilities for XYZ 10% 40% zero dollars Before credit policy changes, 75% of the customers takes the early payment discount. Anticipate only 70% of the customers would take the discount after the change. What is net annual benefit of changing to the new credit policy? Assignment 2 - Problem 2 ABC Inc. is proposing a change in its credit policy to increase sales of Product XYZ Existing terms is 1/10, net 30 New terms is 2/20, net 40 $ $ New sales level (all credit sales) Original sales level (all credit sales) Contribution Margin ration % bad debt losses on new sales level % bad debt losses on original sales level New average collection period (days) Original average collection period (days) Cost of Capital Cost of Goods sold as a percentage of sales 24,000,000 20,000,000 30% 5% 2% 26 15 10% 60% ABC also anticipates to have keep additional inventory. The inventory turnover rate would improve with new sales. Inventory turnover on new sales level Inventory turnover on original sales level 10 5 Financing cost for Working Capital is Tax rate Current Liabilities for XYZ 10% 40% zero dollars Before credit policy changes, 75% of the customers takes the early payment discount. Anticipate only 70% of the customers would take the discount after the change. What is net annual benefit of changing to the new credit policy