Question
North Carolina Furniture Company (NCFC) manufactures upholstered furniture, which it sells to various small retailers in the Northeast and Midwest on credit terms of 2/10,
North Carolina Furniture Company (NCFC) manufactures upholstered furniture, which it sells to various small retailers in the Northeast and Midwest on credit terms of 2/10, net 60. The company currently does not grant credit to retailers with a 3 (fair) or 4 (limited) Dun & Bradstreet Composite Credit Appraisal. If NCFC were to extend credit to retailers in the fair category, an estimated additional $1 million per year in sales could be generated. The estimated average collection period for these customers is 80 days, and the expected bad-debt loss ratio is 8 percent. Approximately 50 percent of these customers are expected to take the cash discount. NCFCs variable cost ratio is 0.6, and its required pretax rate of return on current assets investments is 20 percent. The company also estimates that an additional investment in inventory of $450,000 is necessary for the anticipated sales increase. Determine the net change in NCFCs pretax profits from extending credit to retailers in the fair category. Assume there are 365 days per year. Round your answer to the nearest dollar.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started