Brevard Inc is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $2,250,000 and the average collection period (DSO) is 75 days. Brevard Inc. estimates that tightening the credit terms would reduce annaul sales to $2,025,000 but accounts recievable would drop to 39 days of sales. Brevard's variable cost ratio is 59% and its average cost of funds is 11.2%. Should the change in credit terms be made? Assume all operating costs are paid when inverntory is sold and that all sales are collected at the DSO

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Brevard Inc is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $2,250,000 and the average collection period (DSO) is 75 days. Brevard Inc. estimates that tightening the credit terms would reduce annaul sales to $2,025,000 but accounts recievable would drop to 39 days of sales. Brevard's variable cost ratio is 59% and its average cost of funds is 11.2%. Should the change in credit terms be made? Assume all operating costs are paid when inverntory is sold and that all sales are collected at the DSO.

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