Viaduct Par, Inc., currently sells on terms 1/10, net 30, with bad debt losses at 1% of gross sales. Of the 99% (by dollar value) of the customers who pay, 50% take the discount and pay on Day 10, while the remaining 50% pay on Day 30. 

The firm’s gross sales are currently $2,000,000 per year with cost of sales at 75% (2/3 of total cost is the variable cost component) of the gross sales amount. The firm finances its receivable with a 10% line of credit.

Supposed the President wanted to change the credit policy to just net 20 days. Under these terms, sales would be expected to decrease to $1,800,000 while days sales outstanding drop to 15 days but bad debt losses would still be at 1% of the sales level.

What is your net benefit or cost if the company shifts to the President's proposal? Write amounts fully and not in their short form (e.g. 1,000 and not 1K). Denote as '+' if it is an incremental benefit and '-' if it is an incremental cost.

Answer rating: 100% (QA)

Current Terms 110 net 30 Gross Sales 2000000 Cost of Sales 75 of Sales 075 200000... View the full answer