Problem:
The sales manager at Ryan Company feels confident that if the credit policy at Ryan's were changed, sales would increase ancd consequently, the company would utilize excess capacity. The two credit proposals being considered are as follows:
|
Proposal A
|
Proposal B
|
|
Increase in sales
|
$500,000
|
$600,000
|
|
Contribution margin
|
20%
|
20%
|
|
Bad debt percentage
|
5%
|
5%
|
|
Increase in operating profits
|
$ 75,000
|
$ 90,000
|
|
Desired return on sales
|
15%
|
15%
|
Currently, payment terms are net 30. The proposed payment terms for Proposal A and Proposal B are net 45 and net 90, respectively. An analysis to compare these two proposals for the change in credit policy would include all of the following factors except the
1.Cost of funds for Ryan.
2.Current bad debt experience.
3.Impact on the current customer base of extending terms to only certain customers.
4.Bank loan covenants on days' sales outstanding.