5. Problem 22-06 Problem 22-6 Tightening Credit Terms Kim Mitchell, the new cred

Question

5. Problem 22-06 Problem 22-6 Tightening Credit Terms Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $2.7 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to $2,000,000, but accounts receivable would drop to 47 days of sales and the savings on investment in them should more than overcome any loss in profit. Assume a 365-day year. Vinsons variable cost ratio is 85%, and taxes are 45%. If the interest rate on funds invested in receivables is 17%, should the change in credit terms be made? What is the effect of credit policy change? Do not round intermediate steps. Enter you answer as positive value. Round your answer to the nearest dollar. Net income changed by S The firm change its credit terms. Attempts:

Explanation / Answer

current New Terms 90 30 Sales 2,700,000 2,000,000 Collection period 95 47 Variable cost ratio 85% 85% interest rates 17% 17% Tax rates 45% 45% Current Proposed Incremental savings Amount in receivables                                                   702,740         257,534 cost of receivables                                                   119,466           43,781          75,685 contribution margin                                                   405,000         300,000     (105,000) Net benefit before tax       (29,315) Net benefit after tax       (16,123)

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