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 *
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 10P
Related questions
Question
2
![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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F514f4cff-708f-45c9-94a5-5a1e28e43ac2%2F5110bd88-9ab3-4bbf-ae62-98cff3f440f6%2Fy2nljl_processed.png&w=3840&q=75)
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.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT