Tricia Haltiwinger The President of Braam Industries Has Been Exploring

Tricia Haltiwinger, president of Braam Industries, asked the treasurer to examine changing their net 30 credit policy to increase profits. The treasurer identified three options: relaxing credit decisions; extending credit to net 45; or combining relaxed credit and net 45. Each would increase sales but also default rates, administrative costs, and receivables period. The treasurer provided data on the effect of each option on these variables to determine the best policy.

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Tricia Haltiwinger The President of Braam Industries Has Been Exploring

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Amit Pandey

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Solved: Tricia Haltiwinger the president of Braam

Industries has been exploring

Tricia Haltiwinger, the president of Braam Industries, has been exploring ways of improving the
company’s financial performance. Braam Industries manufactures and sells office equipment to
retailers. The company’s growth has been relatively slow in recent years, but with an expansion
in the economy, it appears that sales may increase more quickly in the future. Tricia has asked
Andrew Preston, the company’s treasurer, to examine Braam’s credit policy to see if a different
credit policy can help increase profitability. The company currently has a policy of net 30. As
with any credit sales, default rates are always of concern. Because of Braam’s screening and
collection process, the default rate on credit is currently only 2.1 percent. Andrew has examined
the company’s credit policy in relation to other vendors, and has determined that three options
are available.
The first option is to relax the company’s decision on when to grant credit. The second option is
to increase the credit period to net 45, and the third option is a combination of the relaxed credit
policy and the extension of the credit period to net 45. On the positive side, each of the three
policies under consideration would increase sales. The three policies have the drawbacks that
default rates would increase, the administrative costs of managing the firm’s receivables would
increase, and the receivables period would increase. The credit policy change would impact all
four of these variables in different degrees. Andrew has prepared the following table outlining
the effect on each of these variables:

Braam’s variable costs of production are 45 percent of sales, and the relevant interest rate is a
6 percent effective annual rate. Which credit policy should the company use? Also, notice that in
option 2 the default rate and administrative costs are below those in option 3. Is this plausible?
Why or whynot?