Khoja currently has a very strict credit policy; its average collection period (or RTD, receivable turnover in
Question:
Khoja currently has a very strict credit policy; its average collection period (or RTD, receivable turnover in days) of 25 days is far below the industry average of 45 days. The firm is considering relaxing its credit policy so that its collection period will be more in line with the industry. You know the following:
Proposed Sales in units is 6/5 of current sales in units
Present selling price per gizmo
Rs25
Relevant Range of Annual fixed costs is from 0 to 400,000 units and Per unit fixed cost is at current level is
Rs2
Present variable cost to selling price ratio
160% to 200%
Required pre-tax rate of return
20%
If Khoja relaxes its credit standards, it expects the following results, which are compared with the present policy below:
CONTENTS
PRESENT POLICY
PROPOSED POLICY
Sales (in units)
?
360,000
Bad-debt losses
2% of sales
1% of units sold
Should the proposed credit policy be instituted in place of the present policy? Assume Moderate approach (if possible otherwise use aggressive approach), a 360-day year and current customers will continue to pay at the present rate.
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair