ABC is considering relaxing its credit terms from the current terms of net 30 to 3/30 net 60. The following information will help you to evaluate the proposal. Show ABC proceeds with the change. Show all relevant calculations.
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New Sales level (all credits)
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$ 9 000 000
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Original Sales level (all credits)
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$ 8 000 000
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Contribution Margin
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25%
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Percentage bad debts losses on new sales
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6%
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New average collection period
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45 days
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Original average collection period
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30 days
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Additional investment inventory
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$ 25 000
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Pretax required rate of return
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15%
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New percentage cash discount
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3%
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Percentage of customers taking cash discount
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50%
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