Jones Motors currently has sales of $1,600,000, and its days sales outstanding is 55 days....
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Jones Motors currently has sales of $1,600,000, and its days sales outstanding is 55 days. The financial manager estimates that raising the discount from 1% to 2% would (1) decrease the days sales outstanding to 30 days, (2) increase customers taking the discount from 30% to 55%, and (3) increase sales by 10%. Assume the company has no bad debt loss and there are 360 days a year. Variable costs are 75 percent of sales, and Jones Motors has a 12 percent receivables financing cost. Prepare a pro forma income statement to show the effect of credit policy change on pre-tax profit of the firm (under old policy, new policy, and the change between the two).
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