Campbell Computing Inc.currently has sales of $1,000,000,and its days sales outstanding is 30 days.The financial manager estimates that offering longer credit terms would (1)increase the days sales outstanding to 50 days and (2)increase sales to $1,200,000.However,bad debt losses,which were 2 percent on the old sales,would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent).Variable costs are 80 percent of sales,and Campbell has a 15 percent receivables financing cost.What would the annual incremental pre-tax profit be if Bass extended its credit period?

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DSO₀ = 30 days; DSO_N = 50 days; no discounts.Calculate cost of carrying receivables at current and new sales levels: Cost of carrying receivables = DSO(Sales/Day) (Variable cost ratio) (Cost of funds) $\text { Sales at } \$ 1,000,000: \quad 30(\$ 1,000,000 / 360)(0.8)(0.15)=\$ 10,000$ $\text { Sales at } \$ 1,200,000: \quad 30(\$ 1,200,000 / 360)(0.8)(0.15)=\$ 20,000$ Analysis of policy changes: 11ea42d0_c0b0_46b8_9abf_9f1aae21c70d_TB2090_00 Bad debt losses old: $ \quad $ $ \quad $ $ \$ 1,000,000(0.02)=\$ 20,000 $ Bad debt losses new: $ \quad $ $ \quad $ $ \$ 1,000,000(0.02)+\$ 200,000(0.05)=\$ 30,000 $ The annual incremental pre-tax profit with the change in policy is $20,000.