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ABC Inc. is proposing a change in its credit policy to increase sales of Product...

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Accounting

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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