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Richardson Inc. wishes to speed up collection of its receivables. Richardson currently offers credit terms of 1/20, net 40. It is considering changing to terms of 2/15 net 30. The collection period is expected to be reduced from 50 to 25 days. The percentage of customers paying within the discount period is expected to increase from 60 percent to 80 percent. Bad debt losses average 5 percent of sales and are not expected to change under the proposed policy. The inventory level is expected to increase by $1,000,000. Annual billings are $25 million. The variable cost ratio is 65 percent. The pretax return on funds made available by this change in policy is 12 percent. Assuming the change in terms is made; determine the net effect on Richardson’s pretax profits.
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