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In a vigorous effort to fend off the impact of the economic recession, Figliuzzi Furniture's management is reviewing their credit policies to reduce the bad
In a vigorous effort to fend off the impact of the economic recession, Figliuzzi Furniture's management is reviewing their credit policies to reduce the bad debt and to improve the collection of account receivables. Currently, annual sales (all credit) are $15 million and the company offers credit terms of 2/10 net 60 days. While 20% of the company's clients use the discount and pay on the 10th day, the average collection period for the balance owed is 70 days and there are bad debt losses of 4% of total credit sales. After studying industry trends and direct competitors, management recommends an introduction of new credit terms of 2/10 net 30 days. Sales are expected to decrease by 10% but variable costs will remain unchanged at 75% sales. With the new credit terms, it is anticipated that 60% of dients will use the discount and pay on the 10th day while the rest of the customers will pay within 45 days on average. Bad debt expense should decrease to 2% of total credit sales. The company's opportunity cost of funds is 10%. If the company changes the credit policy: The incremental change contribution margin is: O($375,000) O$375,000 O($25,000) O$30,000 The incremental change in discount expense is: O$28,380 O($27,900) O$30,100 O($102,000) The incremental change in bad debt expense is: O$188,380 OS237 000
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