PK Ltd is selling one of its products for $20 per unit. The annual sales are 40,000 units, all sold on credit. The variable cost of the product is $11 per unit while total fixed costs are $270,000. PK Ltd’s required return on equal-risk investments is 17%.

The management of PK Ltd is considering relaxing its credit standards in a way that would increase its unit sales to 44,000 units per year. There would be an increase in the average collection period from the current 30 days to 60 days. Bad debts are negligible.

Based on a financial analysis of the proposed change, advise the management of PK Ltd whether it should accept or reject the proposed change.

Answer rating: 100% (QA)

Sales per unit price x total sales Per unit price 20 Total sales 40000 Sales per unit price x total ... View the full answer