The Foxbase Alpha Company is considering a major change in credit policy. Managers are considering extending credit to a riskier class of customer and extending their credit period from net 30 days to net 45 days. They do not expect bad debt losses on their current customers to change.

REQUIRED: Given the above information,

i. Determine the marginal profitability of additional sales

ii. Determine the additional investment in accounts receivable iii. Determine the cost of additional investment in accounts receivable

iv. Determine the cost of additional investment in inventory

v. Determine the additional bad-debt loss vi. Determine the net change in pre-tax profits/losses

vii. Should they go ahead with the change in credit policy?

New Sales level (all credit): $15,000,000

Original Sales level (all credit): $11,000,000

Contribution margin: 20%

Percent bad-debt losses on new sales: 9%

New average collection period: 45 days

Original average collection period: 30 days

Additional investment in inventory: $90,000

Pre-tax required rate of return 15%