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Soler Inc. wishes to speed up collection of its receivables.  Soler currently offers credit terms of net 30.  It is considering changing to terms of 2/10 net 20.  The collection period is expected to be reduced from 40 to 25 days.  The percentage of customers paying within the discount period is expected to be 60 percent.  Bad debt losses average 6 percent of sales and are expected to decrease to 5 percent under the proposed policy

Soler Inc. wishes to speed up collection of its receivables.  Soler currently offers credit terms of net 30.  It is considering changing to terms of 2/10 net 20.  The collection period is expected to be reduced from 40 to 25 days.  The percentage of customers paying within the discount period is expected to be 60 percent.  Bad debt losses average 6 percent of sales and are expected to decrease to 5 percent under the proposed policy

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Soler Inc. wishes to speed up collection of its receivables.  Soler currently offers credit terms of net 30.  It is considering changing to terms of 2/10 net 20.  The collection period is expected to be reduced from 40 to 25 days.  The percentage of customers paying within the discount period is expected to be 60 percent.  Bad debt losses average 6 percent of sales and are expected to decrease to 5 percent under the proposed policy.  The inventory level is expected to increase by $300,000.  Annual billings are $50 million.  The variable cost ratio is 75 percent.  The pretax return on funds made available by this change in policy is 6 percent.  Assuming the change in terms is made; determine the net effect on Soler’s pretax profits.

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