National Co. is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in orde to speed collections. At present, 40% of National Co.'s customers take the 2% discount. Unde the new term, discount customers are expected to rise to 50%. Regardless of the credit terms half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards therefore bad debt losses are not expected to rise above their present 2% percent level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per year. National Co.'s variable cost ratio is 75%, the interest rate on funds invested in accounts receivable is 9%, and the firm's income tax rate is 40%.The incremental after tax profit from the change in credit terms is * Q Cormat: 11 111

National Co. is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in orde to speed collections. At present, 40% of National Co.'s customers take the 2% discount. Unde the new term, discount customers are expected to rise to 50%. Regardless of the credit terms half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards therefore bad debt losses are not expected to rise above their present 2% percent level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per year. National Co.'s variable cost ratio is 75%, the interest rate on funds invested in accounts receivable is 9%, and the firm's income tax rate is 40%.The incremental after tax profit from the change in credit terms is * Q Cormat: 11 111

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 6P

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Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order to speed collections. At present, 40 percent of Sonata Company’s customers take the 2 percent discount. Under the new term, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore bad debt losses are not expected to rise above their present 2 percent level. However, the more generous cash discount terms are expected to increase sales from 2 million to 2.6 million per year. Santa Company’s variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9 per-cent, and the firm’s income tax rate is 40 percent. (Adapted Comprehensive Reviewer in MAS 2010 Edition, Apolinario D. Bobadilla) Determine the following: The days sales…
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