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 $2.64 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 $2,515,000, 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 88%, taxes are 40%, and the interest rate on funds invested in receivables is 15%.

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.

Tightening Credit Terms Firm's current credit terms, net Industry-wide credit terms, net Discounts Bad Debt Losses Firm's variable cost ratio Tax rate Interest rate on funds invested in receivables Days in year 90 days 30 days SO SO 88.00% 40.00% 15.00% 365 Current Credit Policy: Annual credit sales Days sales outstanding, DSO $2.640.000 95 days New Credit Policy, Tighten to Industry-Average Credit Terms: Annual credit sales Days sales outstanding, DSO $2,515,000 35 days Projected Income Statement Under Current Credit Policy $2,640,000 0 LIIGLI UI Credit Policy Change -S125,000 0 Projeced Income Statement Under New Credit Policy $2,515,000 0 20 Changing Credit Policy Analysis 21 Gross sales 22 Discounts 23 Net sales 24 Variable costs 25 Profit before credit costs and taxes 26 Credit-related costs: 27 Cost of carrying receivables 28 Bad debt losses 29 Profit before taxes 30 Taxes 31 Net income 32 33 Should the change in credit terms be made? 0 0 0 Tightening Credit Terms Firm's current credit terms, net Industry-wide credit terms, net Discounts Bad Debt Losses Firm's variable cost ratio Tax rate Interest rate on funds invested in receivables Days in year 90 days 30 days SO SO 88.00% 40.00% 15.00% 365 Current Credit Policy: Annual credit sales Days sales outstanding, DSO $2.640.000 95 days New Credit Policy, Tighten to Industry-Average Credit Terms: Annual credit sales Days sales outstanding, DSO $2,515,000 35 days Projected Income Statement Under Current Credit Policy $2,640,000 0 LIIGLI UI Credit Policy Change -S125,000 0 Projeced Income Statement Under New Credit Policy $2,515,000 0 20 Changing Credit Policy Analysis 21 Gross sales 22 Discounts 23 Net sales 24 Variable costs 25 Profit before credit costs and taxes 26 Credit-related costs: 27 Cost of carrying receivables 28 Bad debt losses 29 Profit before taxes 30 Taxes 31 Net income 32 33 Should the change in credit terms be made? 0 0 0