Tightening Credit Terms Firm's current credit terms, net Industry-wide credit terms, net Discounts Bad Debt Losses Firm's variable cost ratio Tax rate Interest rate on funds invested in receivables Days in year 90 days 30days 63.00% 40.00% 20.00% Current Credit Policy Annual credit sales Days sales outstanding. DSO 2,840,000 95 days New Credit Policy, Tighten to Industry-Average Credit Terms Annual credit sales Days sales outstanding, DSO $2,715,000 35days Effect of Projected Income Statement Under Current Credit Policy Statement Under New Credit Policy Credit Policy 20 Changing Credit Policy Analysis Change $125,000 $2,840,000 0 $2,715,000 21 Gross sales 22 Discounts 23 Net sales 0 25 Profit before credit costs and taxes 26 Credit-related costs: 28 Bad debt losses 0 0 30 Taxes 31 Net income 33 Should the change in credit terms be made