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 27 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 $2,145,000, 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 86 , taxes are 40 , and the interest rate on funds invested in receivables is 17 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 Assuming a 365 day year, calculate the net income under the current policy and the new policy Do not round intermediate calculations Round your answers to the nearest dollar Current policy $ New policy $ Should the change in credit terms be made Firm's variable cost ratio 86 00 Tax rate 40 00 Interest rate on funds invested in receivables 17 00 Days in year 365 Current Credit Policy Annual credit sales $2,270,000 Days sales outstanding, DSO 95 days New Credit Policy, Tighten to Industry Average Credit Terms Annual credit sales $2,145,000 Days sales outstanding, DSO 35 days Changing Credit Policy Analysis Projected Income Statement Under Current Credit Policy Effect of Credit Policy Change Projeced Income Statement Under New Credit Policy Gross sales $2,270,000 $125,000 $2,145,000 Discounts 0 0 0 Net sales Variable costs Profit before credit costs and taxes Credit related costs Cost of carrying receivables Bad debt losses 0 0 0 Profit before taxes Taxes Net income Should the change in credit terms be made Formulas Changing Credit Policy Analysis Projected Income Statement Under Current Credit Policy Effect of Credit Policy Change Projeced Income Statement Under New Credit Policy Gross sales B13 F21 B21 B17 Discounts $B$5 F22 B22 $B$5 Net sales N A N A N A Variable costs N A N A N A Profit before credit costs and taxes N A N A N A Credit related costs Cost of carrying receivables N A N A N A Bad debt losses $B$6 F28 B28 $B$6 Profit before taxes N A N A N A Taxes N A N A N A Net income N A N A N A Should the change in credit terms be made N A

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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

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 $2.27 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 $2,145,000, 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 86%, taxes are 40%, and the interest rate on funds invested in receivables is 17%.

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.

Assuming a 365-day year, calculate the net income under the current policy and the new policy. Do not round intermediate calculations. Round your answers to the nearest dollar.

Current policy: $

New policy: $

Should the change in credit terms be made?

Firm's variable cost ratio	86.00%
Tax rate	40.00%
Interest rate on funds invested in receivables	17.00%
Days in year	365

Current Credit Policy:
Annual credit sales	$2,270,000
Days sales outstanding, DSO	95	days

New Credit Policy, Tighten to Industry-Average Credit Terms:
Annual credit sales	$2,145,000
Days sales outstanding, DSO	35	days

Changing Credit Policy Analysis:	Projected Income Statement Under Current Credit Policy		Effect of Credit Policy Change	Projeced Income Statement Under New Credit Policy
Gross sales	$2,270,000		-$125,000	$2,145,000
Discounts	0		0	0
Net sales
Variable costs
Profit before credit costs and taxes
Credit-related costs:
Cost of carrying receivables
Bad debt losses	0		0	0
Profit before taxes
Taxes
Net income

Should the change in credit terms be made?

Formulas
Changing Credit Policy Analysis:	Projected Income Statement Under Current Credit Policy		Effect of Credit Policy Change	Projeced Income Statement Under New Credit Policy
Gross sales	=B13		=F21-B21	=B17
Discounts	=$B$5		=F22-B22	=$B$5
Net sales	#N/A		#N/A	#N/A
Variable costs	#N/A		#N/A	#N/A
Profit before credit costs and taxes	#N/A		#N/A	#N/A
Credit-related costs:
Cost of carrying receivables	#N/A		#N/A	#N/A
Bad debt losses	=$B$6		=F28-B28	=$B$6
Profit before taxes	#N/A		#N/A	#N/A
Taxes	#N/A		#N/A	#N/A
Net income	#N/A		#N/A	#N/A

Should the change in credit terms be made?	#N/A