Question
Campbell Computing Inc. currently has sales of $2,000,000, and its days sales outstanding is 50 days. The financial manager estimates that offering higher discount from
Campbell Computing Inc. currently has sales of $2,000,000, and its days sales outstanding is 50 days. The financial manager estimates that offering higher discount from 1% to 2% would (1) decrease the days sales outstanding to 35 days, (2) increase customers taking the discount from 50% to 65%, and (3) increase sales to $2,200,000. Assume the company has no bad debt loss and there are 360 days a year. Variable costs are 80 percent of sales, and Campbell has a 12 percent receivables financing cost. Prepare a pro forma income statement to show the effect of credit policy change on pre-tax profit of the firm.
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