Bailey Distributing sells appliances fans to retail outlets. The president of the company is thinking about changing the firm’s credit policy. The present policy calls for a 4/10 net 60 discount. The new policy would call for a 2/10 net 30 discount. Currently, Cash sales that qualify for the trade discount amount to 10 percent of sales, 20 percent of Logan customers would take the trade discount and pay on the 10th day, with the balance paying on the 70th day. It is anticipated that with the new credit policy, 20% will be cash sales, 40 percent will take the trade discount and pay on the 10th day, with the balance paying on the 40th day. It is further anticipated that annual sales would decrease from a level of $4,400,000 to $3,800,000. Bad debt expenses are estimated to be 5 percent of credit sales under the current policy and are estimated to decrease to 3.5% of credit sales under the new credit policy. Inventory turnover would remain at 10 times a year. Variable costs are 80 percent of sales. Credit department expenses would decrease by $40,000 per year. Logan’s banker would continue to finance working capital requirements at 14 percent. 

REQUIRED: Should the new policy be implemented? Show all your calculations

Answer rating: 100% (QA)

Analysis of Bailey Distributings Credit Policy Change Current Policy Discount 410 net 60 4 discount if paid within 10 days net amount due in 60 days Cash Sales Qualify for Discount 10 Customers Taking ... View the full answer