Assignment - completely answer the following questions:
1. Explain the rational for each of the four variables that make up a firm's credit policy. How likely (and how quickly) are competitors to respond to a change in each variable, and is their response likely to be the same for a change toward tightness as one toward looseness?
2. What is Lifelines' current days sales outstanding (DSO) [also called average collection period (ACP)]? What would the expected DSO be if the credit policy change were made?
3. What is the dollar amount of bad debt losses under the current policy? What would be the expected losses under the proposed policy?
4. What is the cost of granting discounts under the current policy? What would be the expected cost under the new policy?
5. What is Lifelines' dollar cost of carrying receivables under the current policy? What would be the expected cost under the new policy? (Use a 360-day year.)
6. What is the expected incremental profit associated with the proposed change in credit terms? Should Lifelines make the change? (Hint: Construct income statements under each policy and focus on the expected change.
7. Does your analysis up to this point consider the risks involved with a credit policy change? If not, how could risk be assessed and incorporated into the analysis?
8. Suppose the firm makes the change to 3/COD, net 25, but Lifelines' competitors react by making similar changes in their terms. The net result is that Lifelines' gross sales remain at the current levels. If Lisa's remaining assumptions were correct, what would be the impact on Lifelines' profitability?