Chan Manufacturing Is Considering an Alternate to Its Credit Policy

question 64

Essay

Chan manufacturing is considering an alternate to its credit policy.At present, the firm sells its product at $42 per unit with monthly sales of 61,000 units.Fifteen% of all sales are for cash; the remainder sold on terms of net 30.The present average cost per unit is $13, and the marginal cost for the next 6,000 units is $20 per unit.Sales are expected to increase by 4,000 units per month if credit terms are altered to 3/15, 1/30, net 60.Cash sales are expected to remain at 15% of total sales.It is expected that 25% of future credit sales will be paid after 15 days, 35% after 30 days, and the remainder after 60 days.The company's tax rate is 45%, and its required after-tax rate of return on investments in receivables is 5% after tax.Should the firm alter its credit terms as indicated?

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Definitions:

Psychosexual Stages

A theory by Sigmund Freud that describes the development of human personality and behavior in terms of a series of stages during childhood, each characterized by a specific erogenous zone and conflict.

Oral

The first stage of Freud's psychosexual development, where pleasure centers on activities involving the mouth.

Phallic

Relating to or resembling a phallus, often used in the context of Freudian psychoanalysis to describe the stage of child development focused on the genitals.

Anal Fixation

In psychoanalytic theory, a fixation at the anal stage of development that can lead to personality traits such as obsessiveness, stinginess, or messiness in adulthood.