DelphyTeck is planning to change its credit policy. The company wants to extend its current credit terms
Question:
DelphyTeck is planning to change its credit policy.
The company wants to extend its current credit terms from net 30 to net 45 days.
It is anticipated that such a move would increasecredit sales from $400 000 to $550 000 while bad debt losses wouldbe 2%on incremental sales.
The firm’s cost of goods sold is 55% of sales.
Operating expenses will remain unchanged.
The company has an opportunity cost of 10% and a tax rate of 40
No other asset buildup will be required to service the new customer.
- Calculate the incremental impact of the policy change using the tablebelow.
Incremental sales |
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Incremental bad debt |
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IncrementalCost of Goods Sold |
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Incremental Profit before tax |
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Incremental Opportunity Cost - Accounts Receivable* |
|
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Total impact of policy change |
|
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Show opportunity cost calculation
- Would you recommend that DelphyTeck change the company’s credit policy? Why or why not?
Introduction to Finance Markets, Investments and Financial Management
ISBN: 978-1119398288
16th edition
Authors: Ronald W. Melicher, Edgar A. Norton