Kari-Kidd Corporation currently gives credit terms of net 30 days. It has $60 million in credit…

Kari-Kidd Corporation currently gives credit terms
of net 30 days. It has $60 million in credit sales, and its average
collection period is 45 days. To stimulate demand, the company may give credit
terms of net 60 days. If it does instigate these terms, sales are expected to
increase by 15 percent. After the change, the average collection period is
expected to be 75 days, with no difference in payment habits between old and
new customers. Variable costs are $0.80 for every $1.00 of sales, and the
companys before-tax required rate of return on investment in receivables is 20
percent.

Kari-Kidd Corporation currently gives credit terms
of net 30 days. It has $60 million in credit sales, and its average
collection period is 45 days. To stimulate demand, the company may give credit
terms of net 60 days. If it does instigate these terms, sales are expected to
increase by 15 percent. After the change, the average collection period is
expected to be 75 days, with no difference in payment habits between old and
new customers. Variable costs are $0.80 for every $1.00 of sales, and the
companys before-tax required rate of return on investment in receivables is 20
percent. Should the company extend its credit period? (Assume a 360-day year.)

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