Question 3 (15) Pharmacy shops experienced a decline in sales after a controversial marketing strategy attracted...

 

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Question 3 (15) Pharmacy shops experienced a decline in sales after a controversial marketing strategy attracted negative publicity. The board of directors appointed an audit firm to investigate the root cause of the problem and to recommend business rescue strategy. In its recommendations the audit firm advised the board to employ a new credit policy, that will attract clients and boost sales revenue. Pharmacy management crafted the new credit policy with the following credit terms: Proposed (NEW) Terms of credit Policy Sales Variable costs Average collection period (ACP) Bad debts Discounts R7 000 000 50% of sales Variable costs Average collection period (ACP) Bad debts Discounts The business has a cost of capital of 12%. 60 days 5% of sales 25% discounts given on 50% of sales The following are the current terms of the credit policy: Current Terms of Credit Policy Sales R5 000 000 45% of sales 180 days 6% of sales 20% discounts given on 40% sales Required: Calculate the effect that the proposed policy will have on earnings before interest and tax (EBIT) and advise whether it will be better to switch to the new policy or remain with the current one. (Assume a 365-day year). Question 3 (15) Pharmacy shops experienced a decline in sales after a controversial marketing strategy attracted negative publicity. The board of directors appointed an audit firm to investigate the root cause of the problem and to recommend business rescue strategy. In its recommendations the audit firm advised the board to employ a new credit policy, that will attract clients and boost sales revenue. Pharmacy management crafted the new credit policy with the following credit terms: Proposed (NEW) Terms of credit Policy Sales Variable costs Average collection period (ACP) Bad debts Discounts R7 000 000 50% of sales Variable costs Average collection period (ACP) Bad debts Discounts The business has a cost of capital of 12%. 60 days 5% of sales 25% discounts given on 50% of sales The following are the current terms of the credit policy: Current Terms of Credit Policy Sales R5 000 000 45% of sales 180 days 6% of sales 20% discounts given on 40% sales Required: Calculate the effect that the proposed policy will have on earnings before interest and tax (EBIT) and advise whether it will be better to switch to the new policy or remain with the current one. (Assume a 365-day year).