Pfizer Pharmaceuticals, Inc. is facing difficulties due to longer average collection period as many of its customers are having liquidity issues and they are delaying payments well beyond the due dates. Furthermore, the bad debt ratio of the company is on the rise as lots of pharmaceutical companies have gone bankrupt or having financial difficulties. In order to address these issues, company is thinking to adopt stringent credit policy in order to reduce bad debt and average collection period. The Management has decided that it will not grant additional credit to any customer beyond 15 days past due on payments. However, such a change of policy has consequences, and it is expected that firm will reduce it current sales to $6.5 million (20% reduction from current level of sale). However, the policy will also help in reduction of bad debts losses by 4% (from 8% to 4%) and average collection period by 35 days (from 110 days to 75 days). The expected decrease in sales will result in decline in inventories by $250000. The firm is maintaining a variable cost ratio of 0.75, and it demands a required rate of returns of 15% on its investments in inventories and receivables. What will be the net effect of this plan on the company’s pretax profits?
Pfizer Pharmaceuticals, Inc. is facing difficulties due to longer average collection period as many of its customers are having liquidity issues and they are delaying payments well beyond the due dates. Furthermore, the bad debt ratio of the company is on the rise as lots of pharmaceutical companies have gone bankrupt or having financial difficulties. In order to address these issues, company is thinking to adopt stringent credit policy in order to reduce bad debt and average collection period. The Management has decided that it will not grant additional credit to any customer beyond 15 days past due on payments. However, such a change of policy has consequences, and it is expected that firm will reduce it current sales to $6.5 million (20% reduction from current level of sale). However, the policy will also help in reduction of
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