**DYL PICKLE**

**CURRENT SITUATION FOR DYL PICKLE COMPANY:**

So = Current sales = $15 million.

V = Variable costs as a % of sales = 70% = 0.7.

1 – V = Contribution margin = 30% = 0.3.

k = Cost of capital invested in receivables = 15% = 0.15.

ACPo = Average collection period = 30 days. (Note: the credit period is 25 days, i.e., net 25.)

Bo = Bad debt loss percentage = 3% = 0.03.

Do = Discount percentage = 0%.

**DYL IS ANALYZING THESE POTENTIAL CREDIT POLICY CHANGES**:

1. Relax credit standards. Expected effects:

DS = Incremental sales – $1 million

Bn = Bad debt losses on new sales (only) = %5

ACPn = ACP on new sales (only) = 45 days

2. As alternative to the above changes, lengthen credit period such that ACP = 45 days. DS = $1 million; Bn = 5% on DS. (Bo = 3% on So.)

3. Shorten credit period to 20 days. DS = -$1 million. Bo will decline from 3% to 2% (on all sales).

4. Allow a 2% discount for payment within 10 days (i.e., 2/10, net 30). 40% of customers will take discounts; Bo will decline to 2% (on all sales); and DS = $1 million.

5. Toughen up on collection policy. New ACP will be 25 days. DS = -$1 million. Bo will go from 3% to 1%.

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Dyle Pickle Question 4 ModifiedStarted: Nov 11 at 1:32pmQuiz Instructions

This is question 4 modified to include an existing discount.

**CURRENT SITUATION FOR DYL PICKLE COMPANY:**

So = Current sales = $15 million.

V = Variable costs as a % of sales = 70% = 0.7.

1 – V = Contribution margin = 30% = 0.3.

k = Cost of capital invested in receivables = 15% = 0.15.

ACPo = Average collection period = 30 days. (Note: the credit period is 25 days, i.e., net 25.)

Bo = Bad debt loss percentage = 3% = 0.03.

**D****o**** = Discount percentage = 1%**. **(1/10 net 30)**

**Probability of taking old discount = 20%**

**Actual credit period for those not taking discount = 40 days**

- What is the
**existing**(old) actual credit period? (remember this is a weighted average calculation)

2. It is proposed that the company offer a new discount of 2/10 net 30. It is expected that 40% of customers will take the discount. It is assumed that the actual credit period for those not taking the discount is 40 days.

What is the **new** actual credit period?

3. What is the total change in investment? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)

4. What is the total change in profits if we assume the bad debt percentage drops to 2% for all sales? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)

5. What is the NPV of this proposed change? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)