Willoughby Industries, Inc

question 72

Multiple Choice

Willoughby Industries, Inc.is considering whether to discontinue offering credit to customers who are more than 10 days overdue on repaying the credit extended to them.Current annual credit sales are $10 million on credit terms of "net 30".Such a change in policy is expected to reduce sales by 10 percent, cut the firm's bad-debt losses from 5 to 3 percent, and reduce its average collection period from 72 days to 45 days.The firm's variable cost ratio is 0.70 (profit contribution ratio is 0.30) and its required pretax return (i.e., opportunity cost) on receivables investments is 25 percent.Determine the net effect of this credit tightening policy on the pretax profits of Willoughby.When converting from annual to daily data or vice versa, assume that there are 365 days per year.

• A)-$863,014
• B)$145,753
• C)-$70,000
• D)$300,000

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Definitions:

Tax Per Unit

A specific amount of tax imposed on each unit of a product or service, often used to regulate consumption or raise government revenue.

Buyers Pay

Buyers pay refers to the amount of money that consumers are required to spend to purchase goods or services.

Tax

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Unit Good

A single item or instance of a product that is produced by a firm or available for sale in markets.