Question
Howlett Industries has annual credit sales of $120 million on terms of net 30. Current expenses for the collection department are running at 2.1 percent
Howlett Industries has annual credit sales of $120 million on terms of net 30. Current expenses for the collection department are running at 2.1 percent of sales, bad debt losses are 1.5 percent of sales, and the DSO is 38 days. Howlett is considering extending the credit period to 45 days. The change is expected to increase bad debt losses to 1.7 percent, increase the DSO to 51 days, and increase collection expenses to 2.3 percent of sales. Sales would increase to $137 million per year. Howletts variable cost ratio is 45 percent, its interest rate is 6 percent, and its marginal tax rate is 34 percent. Assume 365 days per year.
a. Use the income statement approach to find the incremental bad debt losses b. Use the income statement approach to find the incremental cost of carrying receivables c. Use the income statement approach to find the incremental pre-tax profits from this proposal d. Use the incremental analysis equations to find the incremental bad debt losses
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