Berkeley Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Berkeleys cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000 to $15.5 million, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.

Required:

a. What would be the cost to Berkeley of the discounts taken under the new policy?

b. What would the bad debt losses be under the old and the new policy?

c. What would be the cost of carrying receivables under the old and the new policy?

d. What are the incremental pre-tax profits from this proposal? Show calculations using template to analyze changes in credit policy.