Helen Bowers, the new credit manager of the Muscarella Corporation, was alarmed to find that Muscarella sells on credit terms of net 50 days whereas industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $3 million, Muscarella currently averages 60 days sales in accounts receivable. Bowers estimates that tightening the credit terms to 30 days would reduce annual sales to $2.6 million, but accounts receivable would drop to 35 days of sales, and the savings on investment in them should more than overcome any loss in profit.

Muscarella’s variable cost ratio is 70 percent, and its marginal tax rate is 40 percent. If the interest rate on funds invested in receivables is 11 percent, should the change in credit terms be made? All operating costs are paid when inventory is sold.