Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson...

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Kim Mitchell, the new credit manager of the Vinson Corporation,was alarmed to find that Vinson sells on credit terms of net 90days while industry-wide credit terms have recently been lowered tonet 30 days. On annual credit sales of $2.24 million, Vinsoncurrently averages 95 days of sales in accounts receivable.Mitchell estimates that tightening the credit terms to 30 dayswould reduce annual sales to $2,115,000, but accounts receivablewould drop to 35 days of sales and the savings on investment inthem should more than overcome any loss in profit. Assume thatVinson’s variable cost ratio is 85%, taxes are 40%, and theinterest rate on funds invested in receivables is 25%.
The data has been collected in the Microsoft Excel Online filebelow. Open the spreadsheet and perform the required analysis toanswer the questions above.
Assuming a 365-day year, calculate the net income under thecurrent policy and the new policy. Do not round intermediatecalculations. Round your answers to the nearest dollar.
Current policy: $
New policy: $
Should the change in credit terms be made?

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3.8 Ratings (419 Votes)

Yes Credit term should be change because in new credit term moreprofit is than current policyCurrent PolicyNew See Answer

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Kim Mitchell, the new credit manager of the Vinson Corporation,was alarmed to find that Vinson sells on credit terms of net 90days while industry-wide credit terms have recently been lowered tonet 30 days. On annual credit sales of $2.24 million, Vinsoncurrently averages 95 days of sales in accounts receivable.Mitchell estimates that tightening the credit terms to 30 dayswould reduce annual sales to $2,115,000, but accounts receivablewould drop to 35 days of sales and the savings on investment inthem should more than overcome any loss in profit. Assume thatVinson’s variable cost ratio is 85%, taxes are 40%, and theinterest rate on funds invested in receivables is 25%.The data has been collected in the Microsoft Excel Online filebelow. Open the spreadsheet and perform the required analysis toanswer the questions above.Assuming a 365-day year, calculate the net income under thecurrent policy and the new policy. Do not round intermediatecalculations. Round your answers to the nearest dollar.Current policy: $ New policy: $ Should the change in credit terms be made?