Furston Inc. currently has sales of $1 million. Its credit period and days sales outstanding are both 30 days, and 1 percent of its sales end up as bad debts. Furston’s credit manager estimates that, if the firm extends its credit period to 45 days so that its days sales outstanding increases to 45 days, sales will increase by $100,000, but its bad debt losses would rise to 3 percent. Variable costs are 40 percent, and the cost of carrying receivables, r, is 15 percent. Assume a tax rate of 40 percent and 365 days per year.
1 Use the income statement approach to find the incremental bad debt losses
2. Use the income statement approach to find the incremental cost of carrying receivables
3. Use the income statement approach to find the incremental pre-tax profits from this proposal
4. Use the incremental analysis approach to find the incremental bad debt losses
5. Use the incremental analysis approach to find the incremental cost of carrying receivables
6. Use the incremental analysis approach to find the incremental pre-tax profits from this proposal.