XYZ is evaluating whether to loosen its credit terms from 2/10, net 30 to 3/10, net 30. At present, 50 percent of XYZ'S sales are paid on Day 10, whereas, under the new terms, 60% of sales will be paid on Day 10. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on Day 30, whereas the remainder will pay 15 days late (no bad debts exist). But, as a result of the higher cash discount offered with the new terms, sales are expected to increase from $360,000 to $396,000 per year. XYZ'S variable cost ratio is 80% and its cost of funds is 9%. All production costs are paid on the day of the sale. 
Should XYZ change its credit terms? Show your computations and prove your answer.

Answer rating: 100% (QA)

Particulars Present Expected Difference Credit Terms 210 net 30 310 net 30 Collection withi... View the full answer