Currently your firm has an average collection Currently your firm has an average collection period of 67 days and your have been asked to analyze offering a 1/10 net 30 discount to expedite collections. You expect a decrease in the ACP of 9 days (the new ACP would be 58 days). 40% of the customers are expected to take the discount. The current accounts receivable balance is 3.35 million. Sales levels and bad debt expenses are expected to remain constant. Using a 365 day year for your calculations, if the required rate of return on receivables is 14%, what is the expected change in pre tax profit

A loss of about $10,000

Explanation:

Calculation for the expected change in pre tax profit

b.A loss of about $10,000

Current Accout Receivable balance 3,350,000

Average collection period 67

Daily credit sales 50,000

(3,350,000÷67)

New Average Collection Period 58

New Account Receivable balance2,900,000

($50,000×58)

Return 0.14

Change in Account receivable 450,000

(3,350,000-2,900,000)

Value of released Account receivable 63,000

(0.14×450,000)

Total Days365

Total Annual Credit Sales 18,250,000

Taking discount 0.40

(18,250,000×0.40) 7,300,000

Discount Percentage0.01

(7,300,000×0.01) 73,000

Total Cost 73,000

Gain-Cost(63,000-73,000)-10,000

Therefore the expected change in pre tax profit will be a loss of 10,000

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