Excel Online Structured Activity: Tightening Credit Terms Kim Mitchell, the new credit manager of the Vinson Corporation

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Excel Online Structured Activity: Tightening Credit Terms
Kim Mitchell, the new credit manager of the Vinson Corporation,
was alarmed to find that Vinson sells on credit terms of net 90
days while industry-wide credit terms have recently been lowered to
net 30 days. On annual credit sales of $2.21 million, Vinson
currently averages 95 days of sales in accounts receivable.
Mitchell estimates that tightening the credit terms to 30 days
would reduce annual sales to $2,085,000, but accounts receivable
would drop to 35 days of sales and the savings on investment in
them should more than overcome any loss in profit. Assume that
Vinson’s variable cost ratio is 75%, taxes are 40%, and the
interest rate on funds invested in receivables is 15%.
Assuming a 365-day year, calculate the net income under the
current policy and the new policy. Do not round intermediate
calculations. Round your answers to the nearest dollar.
Current policy: $
New policy: $
Should the change in credit terms be made?
The firm should change its credit terms. OR The firm should not
change its credit terms.