Chan Is Contemplating an Extension of Its Credit Period from Net

question 62

Essay

Chan is contemplating an extension of its credit period from net 15 to net 60.Currently, the Chan sells 500,000 units annually at a price of $1.20 per unit.The average cost per unit is $0.85.The credit period extension is expected to increase sales by 60,000 units, and increase bad-debt losses by $10,500 per year.The marginal cost per unit for the decreased number of units to be produced is $0.75.If Chan's tax rate is 45%, and the interest rate on short-term bank loans is 10%, should the firm increase its credit period? What underlying assumptions are important in our analysis?

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Definitions:

Fiduciary Duty

A legal obligation of one party to act in the best interest of another when entrusted with care of money, property, or confidential information.

Corporate Decisions

Corporate decisions are choices or judgments made by the leadership of a corporation that affect the direction, strategy, operations, or governance of the organization.

Preemptive Rights

Rights that allow shareholders to purchase additional shares in a company before the company offers them to the public, protecting their ownership percentage from dilution.

Transferability

The ability of an asset or property right to be sold or otherwise transferred from one party to another.