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National Co. has annual credit sales of P4 million. Its average collection period is 40 days and bad debts are 5% of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2% of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P500,000 annually. Variable costs are 60% of sales and the cost of carrying receivables is 12%. Assuming a tax rate of 35% and 360 days a year, the incremental change in the profitability of the company if stricter policy would be implemented would be *

National Co. has annual credit sales of P4 million. Its average collection period is 40 days and bad debts are 5% of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2% of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P500,000 annually. Variable costs are 60% of sales and the cost of carrying receivables is 12%. Assuming a tax rate of 35% and 360 days a year, the incremental change in the profitability of the company if stricter policy would be implemented would be *

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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National Co. has annual credit sales of P4 million. Its average collection period is 40 days and bad debts are 5% of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2% of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P500,000 annually. Variable costs are 60% of sales and the cost of carrying receivables is 12%. Assuming a tax rate of 35% and 360 days a year, the incremental change in the profitability of the company if stricter policy would be implemented would be * A Zero as the positive and negative effects offset each other. A reduction in net income by P70,000. A reduction in net income by P38,350. A reduction in net income by P35,400.
Transcribed Image Text:National Co. has annual credit sales of P4 million. Its average collection period is 40 days and bad debts are 5% of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2% of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P500,000 annually. Variable costs are 60% of sales and the cost of carrying receivables is 12%. Assuming a tax rate of 35% and 360 days a year, the incremental change in the profitability of the company if stricter policy would be implemented would be * A Zero as the positive and negative effects offset each other. A reduction in net income by P70,000. A reduction in net income by P38,350. A reduction in net income by P35,400.
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