Alpha Limited is a supplier of leather products in the market. Company's major sales are on credit basis, for which, its current average collection period is of 1 month. However, to facilitate its customers company has decided to ease its existing credit policy. New policy will increase average collection period up to 2-months from current 1-month.

Important information if company adopts New Credit Policy:

Company's sales will increase by 25%. An additional investment of Rs. 240,000 will also be required in inventory/stock. Creditors will also be increased by Rs. 65,000.

Information related to Old Credit Policy:

Current annual sales of the company are Rs. 25,00,000. Return on Investment (ROI) of the company under current policy is 20%.

Other important information:

Selling price per unit is Rs. 18

Variable cost per unit is Rs. 15.

Requirements:

a) You are required to analyze the new credit policy under following conditions:

Condition # 1: If all the customers avail two months credit period

Condition # 2: Only new customers avail two months credit period

b) Based upon the results of part (a), suggest either company should go for new policy or not.

Note: Provide complete detailed working for part (a).

Answer rating: 100% (QA)

a Analysis of New Credit Policy Condition 1 If all customers avail 2 months credit Sales Rs 2500000 ... View the full answer