Low (Pty) Ltd is very concerned about their debtors' collection period. Although their normal terms are...

 

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Low (Pty) Ltd is very concerned about their debtors' collection period. Although their normal terms are 2/10 net 30. You have been provided with the following information: Amounts for year ended 31 December 20x5 Credit sales (Gross) Bad debts Discount given Gross profit margin Opportunity cost of credit Debtors balance at end of year 18,000,000 270,000 35,000 35.00% 12.00% 3,205,000 The company believes that they need to tighten their credit terms to 5/30 net 45 to increase the incentive for their customers to pay more quickly. They believe that this will reduce their bad debts to 1% of gross sales and that 50% of gross sales of customers will take the discount. Turnover is expected to rise to N$21 000 000 due to the changes. They expect the debtors' days to change from the current level to 50 days. A finance house has also offered to factor the debtors book of the company at a discount of 15% based on the current credit terms. They would pay all sales 15 days after the sale is made excluding those that opted to make use of the discount. They will take over all credit risk. Required: a) Calculate and comment on the debtor's days. The company offsets bad debts and discount given to credit sales for decision making purposes. (4 marks) b) Determine the impact of the change in credit policy. (10 marks) c) Calculate the impact of the factoring on the company's profits. (6 marks) Low (Pty) Ltd is very concerned about their debtors' collection period. Although their normal terms are 2/10 net 30. You have been provided with the following information: Amounts for year ended 31 December 20x5 Credit sales (Gross) Bad debts Discount given Gross profit margin Opportunity cost of credit Debtors balance at end of year 18,000,000 270,000 35,000 35.00% 12.00% 3,205,000 The company believes that they need to tighten their credit terms to 5/30 net 45 to increase the incentive for their customers to pay more quickly. They believe that this will reduce their bad debts to 1% of gross sales and that 50% of gross sales of customers will take the discount. Turnover is expected to rise to N$21 000 000 due to the changes. They expect the debtors' days to change from the current level to 50 days. A finance house has also offered to factor the debtors book of the company at a discount of 15% based on the current credit terms. They would pay all sales 15 days after the sale is made excluding those that opted to make use of the discount. They will take over all credit risk. Required: a) Calculate and comment on the debtor's days. The company offsets bad debts and discount given to credit sales for decision making purposes. (4 marks) b) Determine the impact of the change in credit policy. (10 marks) c) Calculate the impact of the factoring on the company's profits. (6 marks)

Answer rating: 100% (QA)

Step 14 Computation of cost incurred due to current debtor days Particula... View the full answer