CumChan Manufacturing Is Considering an Alternate to Its Credit Policy

question 44

Essay

CumChan 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:

Drug-Resistant Strains

Bacterial, viral, or other microbial strains that have evolved to resist the effects of drugs designed to kill or inhibit them, often due to misuse or overuse of antibiotics.

Colonies

Groups of individuals of the same species living together, often cooperating and sharing resources, in a collective living situation.

Lassa Virus

A virus that causes Lassa fever, an acute viral hemorrhagic illness, primarily occurring in West Africa.

Phylogeny

The evolutionary history and relationships among individuals or groups of organisms, illustrating their common ancestry.