Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring...

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Lewis Lumber is considering changing its credit terms from net55 to net 30 to bring its terms in line with other firms in theindustry. Currently, annual sales are $360,000, and the averagecollection period (DSO) is 62 days. Lewis estimates that tighteningthe credit terms would reduce annual sales to $355,000, butaccounts receivable would drop to 38 days of sales. Lewis’ variablecost ratio is 65 percent and its average cost of funds is 12percent. Should the change in credit terms be made? Assume alloperating costs are paid when inventory is sold and that all salesare collected at the DSO.

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Lewis Lumber is considering changing its credit terms from net55 to net 30 to bring its terms in line with other firms in theindustry. Currently, annual sales are $360,000, and the averagecollection period (DSO) is 62 days. Lewis estimates that tighteningthe credit terms would reduce annual sales to $355,000, butaccounts receivable would drop to 38 days of sales. Lewis’ variablecost ratio is 65 percent and its average cost of funds is 12percent. Should the change in credit terms be made? Assume alloperating costs are paid when inventory is sold and that all salesare collected at the DSO.