CumChan Is Contemplating an Extension of Its Credit Period from Net

question 85

Essay

CumChan is contemplating an extension of its credit period from net 15 to net 60.Currently, the CumChan 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 CumChan'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:

Commitment Fee

A banking charge imposed on a borrower to keep a line of credit open or to guarantee a loan's terms.

Bank Line

A bank line or line of credit is an arrangement between a financial institution and a customer that sets the maximum loan balance that the borrower can access.

Interest Payments

Interest payments are the amounts paid by borrowers to lenders as compensation for the use of borrowed money or assets, typically expressed as an annual percentage rate.

Compensating Balances

Compensating balances are minimum account balances that a company agrees to maintain in a bank account as part of a borrowing arrangement to offset bank service charges or qualify for better loan terms.