A credit policy proposal is expected to increase sales by $2,500,000 annually. The variable cost of these sales is $2,050,00 and bad debt losses will be expected to be 4.5%.
The annual cost of capital is 10%:

If inventories are expected to increase by $120,000 and receivables are expected to increase by $250,000, what is the expected, annual pre-tax net benefit of the change in policy?

What is the maximum bad-debt loss ratio at which the policy change would be beneficial?

If no increase in receivables or inventory were expected, what is the maximum bad-debt loss ratio at which the policy change would be beneficial?

Answer rating: 100% (QA)

To calculate the expected annual pretax net benefit of the change in policy we need to first calcula... View the full answer