Answer:
Net change in income = $8,100
Explanation:
Given:
Current credit sales= $270,000 per year.
Average collection period= 90 days
A 2/15, net 90 means a 20℅ discount if payment is made within 15 days.
Which means new credit terms increase will be
(90/15) * 20℅ = 120℅
We now find the following:
•Revised sales will be = (current sales * new credit terms increase)
= $270,000 * 120℅ = $324,000
•Increase in sales = ( new sales - current sales)
=$324,000 - $270,000 = $54,000
•Profit increase = (profit percent * Increase in sales)
= 15℅ * $54,000 = $8,100
• Average receivable under existing policy =
= $270,000 * (90/360) = $67,500
• Average under new policy =
$325,000 * (15/360) = $13,500
• Receivable reduction= $67,500 - $13,500 = $54,000
• Interest savings
= $54,000 * 12℅ = $6,480
• Cost of discount =
$324,000 * 2℅ = $6,480
Therefore the net change in income if new credit terms are adopted will be = (increase in profit + interest savings - cost of discount)
= $8,100+$6,480-$6,480
= $8,100
