ABC Inc. currently grants no credit, but it is considering offering new credit terms of net 30. As a result, the price of its product will increase by $2 per unit. The original price per unit is $50.
Expected sales will increase by 1,000 units per year. The original sales are 10,000 units. Variable costs will remain at $25 per unit and bad debt losses will amount to $3,000 per year. The firm will finance the additional investment in receivables by using a line of credit, which charges 5 percent interest. The firm’s tax rate is 20 percent. Should the firm begin extending credit under the terms described?