ABC Inc. is proposing a change in its credit policy to increase sales of Product...
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ABC Inc. is proposing a change in its credit policy to increase sales of Product XYZ Existing terms is 1/10, net 30 New terms is 2/20, net 40
New sales level (all credit sales) $ 24,000,000
Original sales level (all credit sales) $ 20,000,000
Contribution Margin ration 30%
%bad debt losses on new sales level 5%
%bad debt losses on original sales level 2%
New average collection period (days) 26
Original average collection period (days) 15
Cost of Capital 10%
Cost of Goods sold as a percentage of sales 60%
ABC also anticipates to have keep additional inventory. The inventory turnover rate would improve with new sales.
Inventory turnover on new sales level 10
Inventory turnover on original sales level 5
Financing cost for Working Capital is 10%
Tax rate 40%
Current Liabilities for XYZ zero dollars
Before credit policy changes, 75% of the customers takes the early payment discount. Anticipate only 70% of the customers would take the discount after the change. What is net annual benefit of changing to the new credit policy?
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