Question
Mac Inc. is considering shifting its credit terms from 2/10, n/20 to 3/5, n/20 in order to speed up collections. The change does not involve
Mac Inc. is considering shifting its credit terms from 2/10, n/20 to 3/5, n/20 in order to speed up collections. The change does not involve a relaxation of credit standard. Currently, 20% of Mac Inc.'s customers take the 2% discount, 30% pays on time, and the rest on the 25th day. Under the new policy, 25% take the discount, 25% pays on time, and the rest on the 25th day.
But more generous cash discount terms are expected to increase sales from P2,800,000 to P2,300,000 per year. Mac Inc.' variable cost ratio is 70%, the interest rate on funds invested in accounts receivable is 5%, and the firm's income tax rate is 35%. Use 364 days/year.
What is the incremental before-tax profit from change in credit terms?
a)148,694.79
b)156,666.67
c)145,678.56
d)152,888.89
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