Duff Beer is considering loosening its credit standards and lengthening the terms from net 30 days to net 45. Doing so will result in higher sales but also more defaults and extra administrative costs. Assuming variable costs are 45% of sales and 6% discount rate, analyze the current credit policy relative to the proposed changes (shown below). Which policy should the firm adopt?
|
Sales (monthly)
|
Default Rate
|
Admin. Costs
|
Receivables (days)
|
|
Current
|
$12.0 m
|
1.5%
|
2.1%
|
35 days
|
|
Proposed
|
$12.5 m
|
1.9%
|
2.4%
|
51 days
|