Assignment 2 - Problem 2 ABC Inc. is proposing a change in its credit policy to increase sales of Product XYZ Existing terms is 1/10, net 30 New terms is 2/20, net 40 $ 24,000,000 $ 20,000,000 30% 5% 2% 26 15 10% 60% New sales level (all credit sales) Original sales level (all credit sales) Contribution Margin ration % bad debt losses on new sales level % bad debt losses on original sales level New average collection period (days) Original average collection period (days) Cost of Capital Cost of Goods sold as a percentage of sales ABC also anticipates to have keep additional inventory. The inventory turnover rate would improve with new sales. Inventory turnover on new sales level Inventory turnover on original sales level Financing cost for Working Capital is Tax rate Current Liabilities for XYZ 150 10% 40% zero dollars Before credit policy changes, 75% of the customers takes the early payment discount. Anticipate only 70% of the customers would take the discount after the change. What is net annual benefit of changing to the new credit policy?