Johnson Ltd requires advice on its debt collection policy. Its directors are considering two options for reducing bad debts and shortening the period of credit extended to its debtors. Option 1 involves employing an additional credit controller and option 2 involves employing 2 extra staff and allocating additional office space. The costs and likely effect of each of these options is set out below and compared to the current position. Current policy Option 1 Option 2 Annual expenditure on debt collection procedures £120,000 £150,000 £200,000 Bad debt losses (% of sales) 3% 2% 1% Average collection period 2 months 1½ months 1 month Current sales are £4,800,000 a year, and the company requires a 20% return on its investments. Required: Should the current policy be discarded in favour of option 1 or option 2?
Johnson Ltd requires advice on its debt collection policy. Its directors are considering two options for reducing bad debts and shortening the period of credit extended to its debtors. Option 1 involves employing an additional credit controller and option 2 involves employing 2 extra staff and allocating additional office space. The costs and likely effect of each of these options is set out below and compared to the current position. Current policy Option 1 Option 2 Annual expenditure on debt collection procedures £120,000 £150,000 £200,000 Bad debt losses (% of sales) 3% 2% 1% Average collection period 2 months 1½ months 1 month Current sales are £4,800,000 a year, and the company requires a 20% return on its investments. Required: Should the current policy be discarded in favour of option 1 or option 2?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Johnson Ltd requires advice on its debt collection policy. Its directors are
considering two options for reducing bad debts and shortening the period of credit extended to its debtors. Option 1 involves employing an additional credit controller and option 2 involves employing 2 extra staff and allocating additional office space. The costs and likely effect of each of these options is set out below and compared to the current position.
Current policy
Option 1
Option 2
Annual expenditure on debt collection procedures
£120,000
£150,000
£200,000
Bad debt losses (% of sales)
3%
2%
1%
Average collection period
2 months
1½ months
1 month
Current sales are £4,800,000 a year, and the company requires a 20% return on its investments.
Required:
Should the current policy be discarded in favour of option 1 or option 2?
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