Question:
Items 1 and 2 are based on the following information:
A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and reduce the ratio of credit sales to total revenue from 70 to 60%. The company estimates that projected sales would be 5% less if the proposed new credit policy were implemented. The firm's short-term interest cost is 10%.
Projected sales for the coming year are $50 million. Calculate the dollar impact on accounts receivable of this proposed change in credit policy. Assume a 360-day year.
1. $ 3,819,445 decrease.
2. $ 6,500,000 decrease.
3. $ 3,333,334 decrease.
4. $18,749,778 increase.
What effect would the implementation of this new credit policy have on income before taxes?
1. $2,500,000 decrease.
2. $2,166,667 decrease.
3. $ 83,334 increase.
4. $ 33,334 increase.