Answer:
The net change in income if the new credit terms are adopted would be of $ 3,770
Explanation:
In order to calculate the net change in income if the new credit terms are adopted we would have to make first the following calculations:
New sales after new credit terms = ($522,000*110%)
New sales after new credit terms = $ 574,200
Increase in profit from newsales = (Profit % * New sales)
Increase in profit from newsales = (25%*($574,200-$522.000))
Increase in profit from newsales = $ 13,050
Average accounts receivable balance without discount = (Average collection period*Average daily sales)
Average accounts receivable balance without discount = (30*($522,000/360))
Average accounts receivable balance without discount = $ 43,500
Average accounts receivable balance with discount = (Due in days with discount*Average daily sales)
Average accounts receivable balance with discount = (10*($574,200/360))
Average accounts receivable balance with discount = $ 15,950/.
Reduction in accounts Receivable = ($43,500-$15,950)
Reduction in accounts Receivable = $ 27,550
Interest savings is = (Reduction in accounts receivable*firm's bank loan cost)
Interest savings is = ($27,550*8%)
Interest savings is = $ 2,204
Cost of discount = (Discount rate * Sales) = (2%*$574.200) = $ 11,484/.
Therefore, Net Gain/(Loss) is = (Increase in Profit+Interest savings-Cost of discount)
Net Gain/(Loss) is = ($13,050+$2,204-$11,484)
Net Gain/(Loss) is = $ 3,770
The net change in income if the new credit terms are adopted would be of $ 3,770
