Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring...

Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $360,000, and the average collection period (DSO) is 62 days. Lewis estimates that tightening the credit terms would reduce annual sales to $355,000, but accounts receivable would drop to 38 days of sales. Lewis’ variable cost ratio is 65 percent and its average cost of funds is 12 percent. Should the change in credit terms be made? Assume all operating costs are paid when inventory is sold and that all sales are collected at the DSO.

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Lancaster Lumber buys $8 million of materials (net of discounts) on terms 3/5, net 55, and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. If Lancaster decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of 9%, interest paid monthly, based on...

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The Reynolds Corporation buys from its suppliers on terms of 3/18, net 55. Reynolds has not been utilizing the discounts offered and has been taking 55 days to pay its bills. Mr. Duke, Reynolds Corporation vice president, has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 18 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not...

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