Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $2.21 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to $2,085,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit. Assume that Vinsons variable cost ratio is 74%, taxes are 40%, and the interest rate on funds invested in receivables is 23%.

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions above.

F 1 Tightening Credit Terms 90 days 30 days $0 $0 Firm's current credit terms, net 4 Industry-wide credit terms, net Discounts 5 Bad Debt Losses 7 Firm's variable cost ratio Tax rate Interest rate on funds invested in receivables 0 Days in year 74.00% 40.00% 23.00% 365 Current Credit Policy: Annual credit sales Days sales outstanding, DSO $2,210,000 95 days 6 New Credit Policy, Tighten to Industry- Average Credit Terms: Annual credit sales Days sales outstanding, DSO $2,085,000 35 days Effect of Credit Policy Projected Income Statement Under Current Credit Policy $2,210,000 Change Projeced Income Statement Under New Credit Policy $2,085,000 $125,000 0 0 1 2 3 4 5 Changing Credit Policy Analysis: Gross sales Discounts Net sales Variable costs Profit before credit costs and taxes Credit-related costs: Cost of carrying receivables Bad debt losses Profit before taxes Taxes Net income -7 8 9 0 AWN Should the change in credit terms be made