Morning Food, Inc.is a local company that produces only one product: bagels. The company currently has annual sales of $8,398,000 (all on credit). The current credit term is "Net 30", so an average collection period of 30 days. The current level of bad debt is 2% of annual sales.
The company plans to change credit terms to 2/30, net 60. It is expected that 50% of the customers will take the 2 percent discount and pay on the 30th day. The other 50% of the customers will pass the discount and pay on 60th day.
The company is expecting that changes in credit policy will attract new customers and generate additional sales of $1,479,000. The level of bad debt on the original sales will remain constant. However, the company understands that the new relaxed credit terms will also attract non-reliable customers who will not pay back. As a result, the level of bad debt on the additional sales will increase to 6 percent.
Increase in sales will required additional investment in inventory $21,000.
Variable costs of the company's product is 70 percent of the selling price. No increase in fixed costs will be required to increase sales.
The company is able to re-invest funds at 9 percent compounded annually.
Assume 360-days a year.
Calculate increase in accounts receivable from changing the credit policy.