The document presents 3 alternative credit policies for evaluating changes to credit terms, collections, and sales amounts. Policy 1 maintains a 3% discount rate with a 30.5 day sales outstanding. Policy 2 offers a 3% discount rate with a 33 day sales outstanding but increases sales to $17M. Policy 3 lowers the discount rate to 2% with a 27 day sales outstanding and $14M in sales. Each policy calculates bad debt loss, carrying costs of receivables, and projected income statement compared to the current policy.

1. Alternative Policy 1
Credit Terms 3% 20
Net 45
Collections
% Clients Pay on Day
70.00% 20
10.00% 45
20.00% 60
Sales $15,000,000.00
Bad Debts 5.00%
Other Information
Variable Costs 80.00% of Sales
Cost of Funds 8.00%
Tax Rate 40.00%

2. Analysis
Calculation of DSO
% Clients Pay on Day %*Day
70.00% 20 14
10.00% 45 4.5
20.00% 60 12
30.5 DSO
Bad Debt Loss
Sales $15,000,000.00
Bad Debts 5.00%
Bad Debt Loss $750,000.00
Calculation of $ Discount % Discount
Sales % Bad Debt % Collected Sales % Discount $ Discount
$15,000,000.00 5.00% 95.00% 70.00% 3% $0.00
Calculation of $ amount carying cost of receivables $ cost
DSO Sales/Day Vrb costs ratio Cost of funds of receivables
30.5 $41,095.89 80.00% 8.00% $80,219.18
Projected Incoem Statement
Current Policy Change
Gross Sales $15,000,000.00 $12,000,000.00 $3,000,000.00
Less $ discount $0.00 $140,400.00 -$140,400.00
Net Sales $15,000,000.00 $11,859,600.00 $3,140,400.00
Vrb. Production Costs $12,000,000.00 $9,600,000.00 $2,400,000.00
Fixed and Other Costs $800,000.00 $800,000.00 $0.00
Profit before credt costs and taxes $2,200,000.00 $1,459,600.00 $740,400.00
Credit Costs
Carring Costs $80,219.18 $41,030.00 $39,189.18
Bed debt loss $750,000.00 $300,000.00 $450,000.00
Profit before tax $1,369,780.82 $1,118,570.00 $251,210.82
Tax $547,912.33 $447,428.00 $100,484.33
Net Income $821,868.49 $671,142.00 $150,726.49

3. Alternative Policy 2
Credit Terms 3% 20
Net 60
Collections
% Clients Pay on Day
75.00% 20
15.00% 60
10.00% 90
Sales $17,000,000.00
Bad Debts 6.00%
Other Information
Variable Costs 80.00% of Sales
Cost of Funds 8.00%
Tax Rate 40.00%

4. Calculation of DSO
% Clients Pay on Day %*Day
75.00% 20 15
15.00% 60 9
10.00% 90 9
33 DSO
Bad Debt Loss
Sales $17,000,000.00
Bad Debts 6.00%
Bad Debt Loss $1,020,000.00
Calculation of $ Discount % Discount
Sales % Bad Debt % Collected Sales % Discount $ Discount
$17,000,000.00 6.00% 94.00% 75.00% 3% $0.00
Calculation of $ amount carying cost of receivables $ cost
DSO Sales/Day Vrb costs ratio Cost of funds of receivables
33 $46,575.34 80.00% 8.00% $98,367.12
Projected Incoem Statement
Current Policy Change
Gross Sales $17,000,000.00 $12,000,000.00 $5,000,000.00
Less $ discount $0.00 $140,400.00 -$140,400.00
Net Sales $17,000,000.00 $11,859,600.00 $5,140,400.00
Vrb. Production Costs $13,600,000.00 $9,600,000.00 $4,000,000.00
Fixed and Other Costs $800,000.00 $800,000.00 $0.00
Profit before credt costs and taxes $2,600,000.00 $1,459,600.00 $1,140,400.00
Credit Costs $0.00
Carring Costs $98,367.12 $41,030.00 $57,337.12
Bed debt loss $1,020,000.00 $300,000.00 $720,000.00
Profit before tax $1,481,632.88 $1,118,570.00 $363,062.88
Tax $592,653.15 $44,742,800.00 -$44,150,146.85
Net Income $888,979.73 $671,142.00 $217,837.73

5. Alternative Policy 3
Credit Terms 2 15
Net 45
Collections
% Clients Pay on Day
65.00% 15
25.00% 45
10.00% 60
Sales $14,000,000.00
Bad Debts 2.00%
Other Information
Variable Costs 80.00% of Sales
Cost of Funds 8.00%
Tax Rate 40.00%

6. Calculation of DSO
% Clients Pay on Day %*Day
65.00% 15 9.75
25.00% 45 11.25
10.00% 60 6
27 DSO
Bad Debt Loss
Sales $14,000,000.00
Bad Debts 2.00%
Bad Debt Loss $280,000.00
Calculation of $ Discount % Discount
Sales % Bad Debt % Collected Sales % Discount $ Discount
$14,000,000.00 2.00% 98.00% 65.00% 2% $0.00
Calculation of $ amount carying cost of receivables $ cost
DSO Sales/Day Vrb costs ratio Cost of funds of receivables
27 $38,356.16 80.00% 8.00% $66,279.45
Projected Incoem Statement
Current Policy Change
Gross Sales $14,000,000.00 $12,000,000.00 $2,000,000.00
Less $ discount $0.00 $140,400.00 -$140,400.00
Net Sales $14,000,000.00 $11,859,600.00 $2,140,400.00
Vrb. Production Costs $11,200,000.00 $9,600,000.00 $1,600,000.00
Fixed and Other Costs $800,000.00 $800,000.00 $0.00
Profit before credt costs and taxes $2,000,000.00 $1,459,600.00 $540,400.00
Credit Costs $0.00
Carring Costs $66,279.45 $41,030.00 $25,249.45
Bed debt loss $280,000.00 $300,000.00 -$20,000.00
Profit before tax $1,653,720.55 $1,118,570.00 $535,150.55
Tax $661,488.22 $44,742,800.00 -$44,081,311.78
Net Income $992,232.33 $671,142.00 $321,090.33