1. A credit policy proposal is expected to increase sales by $2,500,000 annually. The variable cost of these sales is $2,050,00 and bad debt losses will be expected to be 4.5%.The annual cost of capital is 10% a)If inventories are expected to increase by $120,000 and receivables are expected to increase by $250,000, what is the expected, annual pre-tax net benefit of the change in policy? b)What is the maximum bad-debt loss ratio at which the policy change would be beneficial? c)If no increase in receivables or inventory were expected, what is the maximum bad-debt loss ratio at which the policy change would be beneficial?
2. DSW Racing has annual credit sales of $800,000 on terms of net/30. A proposal to offer terms of 1/10, n/30 is being considered. The proposed discount is not expected to increase sales, but is expected to reduce ACP from the current level of 40 days to 30 days, and bad debt losses are expected to drop from 4% to 3.2%. DSW’s cost of capital is 9% a)If 50% of DSW’s customers (based on dollar sales) take the new discount, what is the expected pre-tax net benefit of the proposal? b)At what new bad-debt loss ratio would this proposal break even?