Question

Problem 7-25 Credit policy decision with changing variables (LO7-4) points eBook Dome Metals has credit sales of $342,000 yearly with credit terms of net 45 days, which is also the average collection period. Assume the firm adopts new credit terms of 2/18, net 45 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 10 percent. The new credit terms will increase sales by 10% because the 2% discount will make the firm's price competitive. Print References a. If Dome earns 20 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.) Net change in income

Answer 1

Credit Term 2/18 Net 45 Net 45 days Sales 342000.00 376200.00 A) Income @ 20% before discounts 68400.00 75240.00 Credit Days 45.00 18.00 Account receivables (Sales/360*Credit Days) 42750.00 18810.00 Reduction in average AR 23940.00 B) 2394.00 Cost @ 10% C) Discounts at 2% 7524.00 Net income (A +B - C) 68400.00 70110.00 Net change in income 1710.00