Chuckâs Beer Distributing is considering changing its credit policy from ânet 45â to â2/20, net 45â. The firm expects its average collection period to decrease by 12 days, and 40% of its customers to take the cash discount. Chuckâs current credit sales of $40 million are not expected to change if the firm offers the cash discount. The firmâs bad-debt loss ratio is expected to remain at 4% if it adopts the credit terms. Chuckâs variable cost ratio is 70%, and it is able to invest at a rate of 16%. The firm does not expect its inventory level to change as a result of its proposed change in credit terms.
Compute the funds released by the change in credit terms.
Compute the net impact the change in credit terms has on Chuckâs pre-tax profits.
Chuckâs Beer Distributing is considering changing its credit policy from ânet 45â to â2/20, net 45â. The firm expects its average collection period to decrease by 12 days, and 40% of its customers to take the cash discount. Chuckâs current credit sales of $40 million are not expected to change if the firm offers the cash discount. The firmâs bad-debt loss ratio is expected to remain at 4% if it adopts the credit terms. Chuckâs variable cost ratio is 70%, and it is able to invest at a rate of 16%. The firm does not expect its inventory level to change as a result of its proposed change in credit terms.
Compute the funds released by the change in credit terms.
Compute the net impact the change in credit terms has on Chuckâs pre-tax profits.