XY Ltd currently extends a credit period of 30 days to its debtors. It intends to change the credit period t0 3/15 net 45 in order to increase sales.

The proposed change in credit terms will have the following implications:

i.Sales will increase by sh .5,000,000 per annum of which sh.800,000 will qualify for discounts.

ii.Bad debts on additional sales will be 10 percent

iii.Production, selling and administration expenses will be 74 percent of the additional sales.

iv.Opportunity costs are estimated to be 10 percent of the increased investment in receivables.

The minimum return expected by the company on all its investment is 10 percent

Required:

Assess the impact of the proposed credit policy on the company's profits and advice the management on the appropriate course of action?

Answer rating: 100% (QA)

To assess the impact of the proposed credit policy on the companys profits we need to consider the a... View the full answer