Ray Hetchka, a retired English professor, recently launched a new business in Miami called Rays Bonefish Paradise (RBP). Ray decided at age 62 that he wasnt quite ready to retire early and lounge around at home living the life of leisure. Rays passion is fishing, and he always dreamed of opening a saltwater fly fishing specialty company. Since Rays educational background was in literature and not in business, he hired you, as a noted business finance expert, to help him with the companys cash management and credit policies. Regarding his companys credit policy, Ray also needs your help to determine if changes are needed. One of his summer interns from the local community college, who will soon graduate with a finance major, recommended that the credit terms be changed from 2/10, net 30 to 3/20, net 45 and that both the credit standards and the collection policy be relaxed. According to the intern, this change would cause sales to increase from $3.6 million to $4.0 million. Currently, 62.5% of RBPs customers pay on Day 10 of the billing cycle and take the discount, 32% pay on Day 30, and 5.5% pay (on average) on Day 60. If the new credit policy is adopted, Ray estimated that 72.5% of customers would take the discount, 10% would pay on Day 45, and 17.5% would pay late, on Day 90. Bad debt losses for both policies are expected to be trivial. Variable operating costs are currently 75% of sales, the cost of funds used to carry receivables is 10%, and the marginal tax rate is 40%. None of these factors would change as a result of a credit policy change. Ray is very eager to learn, so he asked you to perform a detailed analysis and report to help him understand cash management and credit policies. Make sure your report includes details and examples that can help Ray better understand the following key decision points:

g. What variables make up a firms credit policy? In what direction would each be changed if the credit policy is relaxed? How would each variable tend to affect sales, the level of receivables, and bad debt losses?

h. How are the days sales outstanding (DSO) and the average collection period (ACP) related to one another? What would the DSO be if the current credit policy is maintained? If the proposed policy is adopted?

i. What is the dollar amount of discounts granted under the current and the proposed credit policies?

j. Should RBP make the credit policy change? Assume that operating and credit costs are paid on the day of the sale.