1. Wilshire Products generates $30 million in credit sales on the basis of its “net 20” credit policy. In an effort to increase market share, the firm is considering changing to a “net 30” credit policy. Wilshire expects the shift will result in a $5 million increase in credit sales, and an increase in its average collection period from 32 days to 47 days. Wilshire also expects its bad-debt losses to increase from the current 3% level to a new 4% level. Wilshire’s profit ratio is 15% and its required return on A/R is 14%. Should Wilshire lengthen its credit period?
a) Yes, the difference between marginal benefits and marginal costs is $250,000
b) No, the difference between marginal benefits and marginal costs is ($12,740)
c) Yes, the difference between marginal benefits and marginal costs is $512,740
d) No, the difference between marginal benefits and marginal costs is ($55,430)
2. Whiplash Inc. sells $73,000,000 of products to retailers on credit terms of “net 30”, and its ACP is 55 days. To speed up collection of A/R, the firm is considering changing credit terms to “2/10 net 30”. Whiplash expects 40% of its customers to take the discount and for its ACP to decline to 35 days. If the firms required return on A/R is 15%, should they offer the discount?
1) No, the net expected benefit is ($3,599)
2) No, the net expected benefit is ($294)
3) Yes, the net expected benefit is $28,000
4) Yes, the net expected benefit is $16,000