Company XXX refuses to extend credit to any wholesale distributors who have a history of bein deliquent in repaying credit extend to them

this policy results in lost of sales of 10 million

This firms estimates that the average collection period would be 90 days and that the bad debt loss ratio would be 6%

The firms variable cost ratio is 0.80

Making its profit contribution ratio 0.20

Requiered pretax return (opportunitie cost ) on recevables investments is 20%

When converting from annual to daily data or viceversa, asume there are 365 days per year

Determine the net effect on pretax profit of extending credit to these ( previous delinquent customers)

Variable cost ratio _______________

Requiered rate of return on current assets investments________________________

additional sales ___________________________

Average collection Period ___________________

Bad debt loss ratio____________________________

Under the existing policy the company foregoes $10 million of sales.

Thus sales will increase if the company changes the existing policy?

Impact of change on pre tax profits

Additional Sales___________________

Profit contribution of additional sales______________________

Additional investments in Accounts receivable ?______________

Cost of additional investment in accounts receivable ?___________

Additional bad debt loss?_____________

Net change in pre tax profit? __________________