Solved – Kidd Corporation presently gives credit terms of “net 30 days”. It has $60 Million in credit sales and its average collection period is 45 days

Question

Kidd Corporation presently gives credit terms of “net 30 days”. It has $60 Million in credit sales and its average collection period is 45 days. To stimulate demand, the company may give credit terms of “net 60 days”. If it does instigate these terms, sales are expected to increase by 15%. After the change, the average collection period is expected to be 75 days, with no difference in payment habits between old and new customers. Variable costs are $0.80 for every $1.00 of sales and the company’s before tax required rate of return on investment is 20%. Should the company extend its credit period? (Assume a 360-day year)

Answer