8:47 Vol 73% Your first major assignment after your recent promotion at Company_X involves overseeing the management of accounts receivable and inventory. The first item that you must attend to is a proposed change in credit policy that would relax credit terms from the existing in hopes of securing new sales. The management at at Company_X does not expect bad-debt losses on its current customers to change under the new credit policy. The following information should aid you in the analysis of this problem: New sales level (all credit) = RM8.000,000 Original sales level (all credit) = RM7,000,000 Contribution margin = 30% Percentage of bad-debt losses on new sales = 10% New average collection period = 85 days Original average collection period = 60 days Additional investment in inventory = RM50,000 Pretax required rate of return = 10% New cash discount percentage = 3% Percentage of customers taking the new cash discount = 50% Original cash discount percentage = 1.5% Percentage of customers taking the old cash discount = 50% To help the firm in reaching a decision on whether to relax its credit terms, you have been asked to respond to the following questions: a) What determines the size of the investment Company X makes in accounts Your answer b) What is the estimated change in profits resulting from the increased sales less any additional bad debts associated with the proposed change in credit policy? Your answer 4) Fatimate the cost of the additional Investment in accounts receivable and nventory associated with this charge in credit policy. Your an d) Estimate the change in the cost of the cash discount if the proposed charge in the credit policy is enacted. You m e) Compare the incremental revenues with the incremental costs. Should the proposed change he enacted? |||