Reference no: EM131750825

Question: Taran Ltd. is reviewing its credit policy. Currently, Taran offers terms of 1 / 10, net 4 5 and the selling price of its product is $25 per unit. Production costs (including variable overhead) for a range of 500,000 to 800,000 units per year are $2 1 per unit, with current annual sales at 700,000 units. Accounts receivable are financed through a bank loan at 1 0-percent interest. Forty percent of the units sold are paid for within 10 days, and the remainder are paid for after 45 days. Two percent of sales on which the cash discount is not taken have to be written off as bad debts. Taran considers tightening its credit policy by offering terms of net 30. If this policy is put into effect, sales are expected to drop to 650,000 units, and bad-debt expenses would amount to a flat $50,000 per year. Taran's tax rate is 45 percent. Should the proposed change in credit policy be implemented?