What is the incremental after-tax profit associated with the change in credit terms? Should the company make the change? (Assume a tax rate of 40%.)

Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business with his brother, Jim, who majored in building construction. The firm would sell primarily to general contractors, and it would start operating next January. Sales would be slow during the cold months, rise during the spring, and then fall off again in the summer, when new construction in the area slows. Sales estimates for the first 6 months are as follows (in thousands of dollars):

The terms of sales are net 30, but because of special incentives, the brothers expect 30% of the customers (by dollar value) to pay on the 10th day following the sale, 50% to pay on the 40th day, and the remaining 20% to pay on the 70th day. No bad debt losses are expected because Jim, the building construction expert, knows which contractors are having financialproblems.

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Old $1,000,000 $1,000,000 New Difference Gross sales Less discounts Net sales Production costs Profit before credit costs and taxes 250,000 Credit-related costs: Carrying costs Bad debt losses Profit before taxes 8,000 20,000 222,000 88,800 133,200 Taxes 40%) Net income ayS200 100 $100 arch S300 Mav January February April 300 June 200