Please I need help with this!! Wilshire Products generates $30 million in credit
ID: 2800208 • Letter: P
Question
Please I need help with this!!
Wilshire Products generates $30 million in credit sales on the basis of its “net 20” credit policy. In an effort to increase market share, the firm is considering changing to a “net 30” credit policy. Wilshire expects the shift will result in a $5 million increase in credit sales, and an increase in its average collection period from 32 days to 47 days. Wilshire also expects its bad-debt losses to increase from the current 3% level to a new 4% level. Wilshire’s profit ratio is 15% and its required return on A/R is 14%. Should Wilshire lengthen its credit period?
Question options:
a) Yes, the difference between marginal benefits and marginal costs is $250,000
b) No, the difference between marginal benefits and marginal costs is ($12,740)
c) Yes, the difference between marginal benefits and marginal costs is $512,740
d) No, the difference between marginal benefits and marginal costs is ($55,430)
Explanation / Answer
Cost Benefit Analysis:
Benefit: Increase in profit = 5000,000 x 15% = $ 750,000
Costs:
Increase in Interest Cost = $262,740
{35,000,000x47/365x14% - 30,000,000x32/365x14%}
Increase in Bad Debts = $ 500,000
{35,000,000x4% - 30,000,000x3%}
Total Increase in cost = $ 762,740
b) No, the difference between marginal benefits and marginal costs is ($12,740)
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