Widget Manufacturing Company's current credit terms are 1/10, net 30.Widget is considering changing its terms to 2/10, net 40, relaxing its credit standards, and putting less pressure on slow-paying customers. Data for the existing credit policy is appended below along with Management's forecasted expectations for new policy changes. Based on the information provided, complete the cost of carrying receivables for both the current and new credit policy.

Current New Policy Policy Annual sales = $410,000 $550,000 Discount = 1% 2% % customers who take discount = 50% 60% % customers who pay on day 10 50% 60% % customers who pay on day 40% 0% % customers who pay on day 40 10% 20% % customers who pay on day 0% 20% Variable cost ratio = 55% 55% Cost of funds = 12% 12% Bad debt percent = 2.6% 6.1% Credit analysis and collections expenses = 56,000 54,000 Current DSO = 24 Current discounts = $2,050 56,600 Cost of carrying = (D50)(Sales per day)(VC ratio) (Cost of funds) Cost of carrying $1,557 52,387 Bad debt losses = $10,660 $33,550 Since the DSO increases the firm will receive the cash from profits on sales later. This is an opportunity cost since the firm doesn't have the cash from profits to make investments. Opportunity cost = (Old sales/365)(4DSO)(1 - V)(r) = $182 Widget Manufacturing Company: Analysis of Changing Credit Policy Complete the missing information for the Net Income Statement below: Projected 2016 Net Projected 2016 Income Under Effect of Net Income Current Credit Credit Policy Under New Policy (1) Change (2) Credit Policy (3) Gross sales $410,000 $550,000 Less discounts $2,050 $4.550 56.600 Net sales $407, 950 $135,450 $543,400 Production costs, including OH Profit before credit costs and taxes $407,950 $135,450 $543,400 Credit related costs: Cost of carrying receivables Credit analysis and collection expenses Bad debt losses Profit before taxes 5407,950 $135,450 $543,400 Taxes (25%) $101.988 $33,863 $135.850 Net Income