Reference no: EM131750817

Question: At present, the Chocolate Cookie Company's products sell at $4.50 a unit with monthly sales of 1 50,000 units. Thirty percent of all sales are for cash; the remainder are sold on terms of net 30. The present average cost per unit is $2.50, and the marginal cost for the next 1 5,000 units per month would be $2.00 per unit. If the credit terms are altered to 2 / 10, 1 / 30, net 60, sales are expected to increase by 1 2,000 units per month. Cash sales will remain at 30 percent of total sales. It is assumed that 35 percent of future credit sales will be paid after 10 days, 10 percent after 30 days, and the balance after 60 days. Based on past experience, bad debts amount to 1 percent of credit sales, and it is assumed that they will remain at 1 percent of any sales not paid after 10 days. The company's tax rate is 50 percent, and its required rate of return on investments in receivables is 7.5 percent after tax. Should the firm alter its credit terms as indicated?