Reese Brothers Publishers Inc (RBP) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 6%. Since RBP wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $800,000 and shorten the DSO to 30 days. Expected bad debt losses would fall to 4% of sales. The variable cost percentage is 60%, profit margin is 35%, and the cost of capital is 14%. Use a 365-day year for any relevant calculations.

6. Refer to Reese Brothers. What would be the incremental bad losses if the change were made? a. $332,000 b. $300,000 c. -$332,000 (bad debt losses would decline) d. -$300,000 (bad debt losses would decline) e. $0 (no change would occur)

7. Refer to Reese Brothers. What would be the incremental cost of carrying receivables if this change were made? a. -$135,493 (carrying costs would decline) b. -$118,175 (carrying costs would decline) c. $135,493 d. $118,175 e. $106,208

8. Refer to Reese Brothers. What are the incremental pre-tax profits from this proposal? (Hint: Start with Sales, subtract Production Costs, then account for credit costs of BDLs and Carrying Costs.) a. $130,175 b. $183,493 c. $200,359 d. $230,250 e. $241,562

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