A meeting was held at ABC Ltd due to decreased sells. Marketing manager blamed the current policy of 2/15 net 40 as credit terms and told that the strict credit terms are responsible for not been able to achieve target sell of Rs. 30 million in last year and missed by Rs. 5 million. He suggested relaxing the credit terms to 2/ 20 net 60 as credit terms. Finance manager opposed the advice and informed that already average payment period of discount sell is 10 days and their proportion is 40% of total sells. Moreover credit sales average payment is 50 days. With the new policy, he expected that customers availing discount will decrease to 30% and their average payment period will become 15 days. Moreover the payment period of credit sell will shoot up to 75 days. He also said that extended credit is likely to increase bad debts from current 2% to 4%. Variable cost ratio to sell is 60%, Cost of Capital is 12%. Compute average collection period of both policies and evaluate suggested policy.
A meeting was held at ABC Ltd due to decreased sells. Marketing manager blamed the current policy of 2/15 net 40 as credit terms and told that the strict credit terms are responsible for not been able to achieve target sell of Rs. 30 million in last year and missed by Rs. 5 million. He suggested relaxing the credit terms to 2/ 20 net 60 as credit terms.
Finance manager opposed the advice and informed that already average payment period of discount sell is 10 days and their proportion is 40% of total sells. Moreover credit sales average payment is 50 days. With the new policy, he expected that customers availing discount will decrease to 30% and their average payment period will become 15 days. Moreover the payment period of credit sell will shoot up to 75 days. He also said that extended credit is likely to increase
Variable cost ratio to sell is 60%, Cost of Capital is 12%. Compute average collection period of both policies and evaluate suggested policy.
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