Problem:
Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on terms of "net 120." Its average collection period is 150 days. The company is considering the introduction of a 4 percent cash discount if the customer pays within 30 days. Such a change in credit terms is expected to reduce the average collection period to 108 days. Epstein expects 30 percent of its customers to take the cash discount. Annual credit sales are $6 million. Epstein's variable cost ratio is 0.667, and its required pretax return on receivables investment is 15 percent. The company does not expect its inbventory level to change as a result of the change in credit terms. Determine the following:
a. The funds released by the change in credit terms
b. The net effect on Epstein's pretax profits.
Assume there are 365 days per year.