Using the template answer the following question

Current Proposed

Policy Policy Difference

Gross sales

- Cash discounts (Gross sales * % taking discount * discount % * [1- bad debt %])

Net sales

- Variable costs (% of gross sales)

- Bad debts (gross sales * bad debt %)

- Credit evaluation and collection costs

- Receivables carrying cost **

Before tax revenue

- Tax

After tax revenue

** Receivables investment = A/R balance * variable cost ratio

= (DSO * Sales/day) * V

Receivables carrying cost = Receivables investment * opportunity cost of funds

= [DSO * Sales/360 * V] * r

If proposed policy results in greater after tax revenue than current policy, accept proposed changes.

Berkeley Prints 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 5 percent. Also, Berkeleys cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000 to $15.5 million, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.