Question

Power corp’s profit is declining because of the economic downturn. To enhance profitability and to preserve cash, Power corp is considering shortening its credit period and eliminating its cash discount. Terms are currently 3/10, net 60 and would be changed to net 30. Currently, 70 percent of customers, on average, pay at the end of the credit period (60 days); the other 30 percent pay, on average, in 10 days and receive the discount. It is anticipated that under the new policy customers will pay, on average, in 30 days. At present, average monthly sales are $550,000, but they are expected to fall to $450,000 with the tightening of credit. Variable production costs are 79 percent, and bank financing is currently floating at 11 percent. Bad debt losses at 2.5 percent of sales are expected to drop to 2.0 percent of sales.

Please provide complete calculations and correct answer.

Answer 1