Company X is considering changing the credit terms on its sales from 2/10 n/30 to 3/10 n

30, in order to speed up collections.

It is estimated that the increased discount would mean that the percentage of customers taking

discounts would increase from 70% to 85%, thereby reducing the average collection period from

24 to 16 days. It is not expected that bad debt losses would change from their present level of

2% of sales.

The better discount terms would increase credit sales from $1,000,000 to $1,200,000 per year.

The company's profit margin is 20%, and it can earn 15% on any funds freed up by a decrease in

receivables.

Evaluate the proposal to change the credit terms.