Office furniture manufacturer Braam Industries is looking to improve its financial performance after experiencing slowing growth over the last few years. The CFO has asked you to analyze the firmâ??s credit policy in an attempt to boost sales and profitability. The current terms are net 30 days, and the screening and collection process has resulted in a low default rate of only 1.5% of sales. You are considering three options that will result in higher sales but also higher default rates and longer collection periods:
Sales (millions) Default Rate Admin. Costs Receivables (days)
Current $120m 1.5% 2.1% 38 days
Option 1 $140m 2.4% 3.1% 41 days
Option 2 $137m 1.7% 2.3% 51 days
Option 3 $150m 2.1% 2.9% 49 days
Variable costs are 45% of sales and the cost of debt is 6%. Analyze the three options relative to the current policy and write a report detailing your findings and you recommendation.