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Chapter 15 Spreadsheet Problem
Managing Short-Term Assets
Use the model in File C15 to solve this problem.
Helen Bowers, the new credit manager of the Muscarella Corporation, was alarmed to find that
Muscarella sells on credit terms of net 50 days whereas industry-wide credit terms have recently been
lowered to net 30 days. On annual credit sales of $3 million, Muscarella currently averages 60 days’
from $150,000 to $175,000 because the collection department will put more effort into collecting
delinquent accounts.
Muscarella’s variable cost ratio is 70 percent, and its marginal tax rate is 40 percent.
a. If the Muscarella’s required rate of return is 11 percent, should the change in credit terms be made?
Assume all operating costs are paid when inventory is sold.
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the days sales outstanding (DSO) would fall to 50 days under this policy. But, this policy will
increase bad debts to 6 percent. Should Bowers enact this change?
d. Bowers also believes that if she leaves the credit policy as it is, sales will increase to $3.4 million
and the DSO will remain at 60 days. Should Bowers leave the credit policy alone or tighten it as
described in either part b or part c? Bad Debts would be 5 percent.