The Foxbase Alpha Company is considering a major change in credit policy. Managers are considering extending credit
Question:
The Foxbase Alpha Company is considering a major change in credit policy. Managers are considering extending credit to a riskier class of customer and extending their credit period from net 30 days to net 45 days. They do not expect bad debt losses on their current customers to change.
REQUIRED:
Given the information,
i. Determine the marginal profitability of additional sales
ii. Determine the additional investment in accounts receivable iii. Determine the cost of additional investment in accounts receivable
iv. Determine the cost of additional investment in inventory
v. Determine the additional bad-debt loss vi. Determine the net change in pre-tax profits/losses
vii. Should they go ahead with the change in credit policy?
New Sales level (all credit): ...........................$15,000,000
Original Sales level (all credit):...................... $11,000,000
Contribution margin: ..................................................20%
Percent bad-debt losses on new sales: ......................9%
New average collection period: ...........................45 days
Original average collection period: ......................30 days
Additional investment in inventory: .....................$90,000
Pre-tax required rate of return .................................15%