The Johnson Company sells 3,300 pairs of running shoes per month at a cash price of $90 per pair. The firm is considering a new policy that involves 30 days' credit and an increase in price to $91.84 per pair on credit sales. The cash price will remain at $90, and the new policy is not expected to affect the quantity sold. The discount period will be 15 days. The required return is 1 percent per month.
a. How would the new credit terms be quoted?
b. What investment in receivables is required under the new policy?
c. Explain why the variable cost of manufacturing the shoes is not relevant here.
d. If the default rate is anticipated to be 11 percent, should the switch be made? What is the break-even credit price? The break-even cash discount?