Bey Technologies is considering changing its credit terms from 2/15, net 30, to 3/10, net 30, to speed collections. At present, 40 percent of Bey’s paying customers take the 2 percent discount. Under the new terms, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore, bad debt losses are not expected to rise above their present 2 percent level. However, the more generous cash discount terms are expected to increase sales from $2 million to $2.6 million per year. Bey’s variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm’s marginal tax rate is 40 percent. All costs associated with production and credit sales are paid on the day of the sale.
a. What is the days sales outstanding before and after the change?
b. Calculate the costs of the discounts taken before and after the change.
c. Calculate the bad debt losses before and after the change.
d. Should Bey change its credit terms?