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The Marketing Manager of Toddler Toys Ltd has been looking at ways to increase sales....

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Finance

The Marketing Manager of Toddler Toys Ltd has been looking at ways to increase sales. He is proposing that the company offer more attractive credit terms of 3/10 net 60. The positive effect of these new credit terms would be a projected to increase in sales to $6.2 million with 80% of customers taking the discount. The negative effect would be an increase in the average collection period to 30 days and an increase in bad debts to 1.5% of credit sales. It is expected that the companys contribution margin of 6.5% would hold with the expansion of sales, as would its short-term financing cost of 7%.

Currently, Toddler Toys Ltds credit terms are 2/10, net 30. The average collection period is 25 days, with 90% of sales currently taking the discount. If the current credit term are continued, next years sales are projected to be $4.5 million. All sales are on credit, and bad debts are expected to be 1% of credit sales.

Required: Advise Toddler Toys Ltd. whether or not it should change its credit policy as recommended by its Marketing Manager. Show all calculations.

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