A company with $4.8 million in credit sales per yr plans to relax its credit standards,projecting that this will increase credit sales by $720000.The company's average collection period for new customers is expected to be 75 days and the payment behaviour of the existing customers is not expected to change.Variable costs are 80% of sales.The firms opportunity  cost is 20% before taxes.Assuming a 360 day year,what is the companys benefit(loss)on the planned change in credit terms?

Could anyone please let  me know how to solve this?

Thanks.

I read the solution.

The ans is $120000 ($144,000 - $24,000)

$720,000 sales x 20% CM = $144,000

($720,000 x 80%)/360 x 75 x 20% =$24,000

I dont get the second part..(ie, $24,000) ..I cant understand why the VC is taken into account. Please advise. Thank you in advance!

I believe, 20 % opportunity cost has to be deducted and opportunity cost is calculated on variable cost, hence 20 % of 576000 for 75 days/ 360 days = 24000

Hope this clarifies