Question:
Tobin Fisheries presently sells to its customers on terms of 2/10, net 30. Its average collection period is 15 days, with 80 percent currently taking the discount. All sales are credit sales. Upper Management would like a maore attractive credit package. Next years sales are projected to be #3.1 million. It has been estimated that with terms of 3/10, net 60, sales next year would jump to $4.2 million and 60% of sales would take the discount, but the average collection period would increase to 34 days. Tobin's contribution margin of 5.5% would hold with the expansion of sales, as would its short term financing cost of 10%. Should tobin initiate the change in credit policy?