Bey Technologies is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 to speed collections. Currently, 40 percent of Bey’s non default customers take the 2 percent discount. Under the new terms, discount customers are expected to rise to 50 percent of the non-default customers. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not evolve a relaxation of credit standards; therefore, bad debt losses are not expected to rise above their current 2 percent level. However, the more generous cash discount terms are expected to increase sales from $2 million to $2.6 million per year. Bey’s variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm’s marginal tax rate is 40 percent.
a. What is the days sales outstanding before and after the change?
b. Calculate the discount costs before and after the change.
c. Calculate the dollar cost of carrying receivables before and after the change
d. Calculate the bad debt losses before and after the change.
e. What is the incremental profit from the change of credit terms? Should Bey change its credit terms?