Question
Geoffreys Toy Box currently has sales of $1,000,000, and its days sales outstanding is 30 days. The new CFO estimates that offering longer credit terms
Geoffreys Toy Box currently has sales of $1,000,000, and its days sales outstanding is 30 days. The new CFO estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase sales to $1,200,000. However, bad debt losses, which were 2 percent on the old sales, would increase to 5 percent on the incremental sales while bad debts on the old sales would stay at 2 percent. Variable costs are 80 percent of sales, and Geoffreys Toy Box has a 15 percent receivables financing cost. Given corporate taxes of 21%, what would the annual incremental after-tax profit be if Geoffreys Toy Box extended its credit period?
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