2B5HH FOSTER PRODUCTS IS REVIEWING ITS TRADE CREDIT POLICY WITH RESPE...
155.
CSO: 2B5d
LOS: 2B5hh
Foster Products is reviewing its trade credit policy with respect to the small retailers to
which it sells. Four plans have been studied and the results are as follows.
Annual
Bad
Collection
Accounts
Plan
Revenue
Debt
Costs
Receivable
Inventory
A
$200,000
$ 1,000
$1,000
$20,000
$40,000
B
250,000
3,000
2,000
40,000
50,000
C
300,000
6,000
5,000
60,000
60,000
D
350,000
12,000
8,000
80,000
70,000
The information shows how various annual expenses such as bad debts and the cost of
collections change as sales change. The average balance of accounts receivable and
inventory have also been projected. The cost of the product to Foster is 80% of the
selling price, after-tax cost of capital is 15%, and Foster’s effective income tax rate is
30%. What is the optimal plan for Foster to implement?
a.
Plan A.
b.
Plan B.
c.
Plan C.
d.
Plan D.