White Inc. wishes to speed up collection of its receivables. White currently offers credit terms of 1/20, net 40. It is considering changing to terms of 2/15 net 30. The collection period is expected to be reduced from 40 to 20 days. The percentage of customers paying within the discount period is expected to increase from 50 percent to 75 percent. Bad debt losses average 6 percent of sales and are not expected to change under the proposed policy. The inventory level is expected to increase by $2,000,000. Annual sales are $30 million. The variable cost ratio is 70 percent. The pretax return on funds made available by this change in policy is 10 percent. Assuming the change in terms is made; determine the net effect on White’s pretax profits.

White Inc. wishes to speed up collection of its receivables. White currently offers credit terms of 1/20, net 40. It is considering changing to terms of 2/15 net 30. The collection period is expected to be reduced from 40 to 20 days. The percentage of customers paying within the discount period is expected to increase from 50 percent to 75 percent. Bad debt losses average 6 percent of sales and are not expected to change under the proposed policy. The inventory level is expected to increase by $2,000,000. Annual sales are $30 million. The variable cost ratio is 70 percent. The pretax return on funds made available by this change in policy is 10 percent. Assuming the change in terms is made; determine the net effect on White’s pretax profits.

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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