A company currently extends a credit period of 38 days to its debtors. It intends to change the credit period to 3.5/15 net 52 in order to increase sales. The proposed change in credit terms will have the following implications. Sales will increase by sh. 12,000,000 per annum of which sh.1,800,000 will qualify for discounts. Bad debts on the additional sales will be 2% Production, selling and administration expenses will be 80% of the additional sales. Opportunity costs are estimated to be 14% of the increased investment in receivables. The minimum return expected by the company on all its investments is 14% Required: Advise the management on whether to revise its credit policy.
A company currently extends a credit period of 38 days to its debtors. It intends to change the credit period to 3.5/15 net 52 in order to increase sales. The proposed change in credit terms will have the following implications. Sales will increase by sh. 12,000,000 per annum of which sh.1,800,000 will qualify for discounts. Bad debts on the additional sales will be 2% Production, selling and administration expenses will be 80% of the additional sales. Opportunity costs are estimated to be 14% of the increased investment in receivables. The minimum return expected by the company on all its investments is 14% Required: Advise the management on whether to revise its credit policy.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A company currently extends a credit period of 38 days to its debtors. It intends to change the credit period to 3.5/15 net 52 in order to increase sales. The proposed change in credit terms will have the following implications.
- Sales will increase by sh. 12,000,000 per annum of which sh.1,800,000 will qualify for discounts.
Bad debts on the additional sales will be 2%- Production, selling and administration expenses will be 80% of the additional sales.
- Opportunity costs are estimated to be 14% of the increased investment in receivables.
The minimum return expected by the company on all its investments is 14%
Required:
Advise the management on whether to revise its credit policy.
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