Shocks Ltd sells shock absorbers to mechanical workshops on credit only. The management of the company...

Transcribed Image Text:

Shocks Ltd sells shock absorbers to mechanical workshops on credit only. The management of the company estimated that it could increase sales by offering better credit terms. Currently, the days sales outstanding (or average collection period) is 30 days. It is expected that this will change to 45 days under the new standards. Sales are expected to increase from R150 m to R180 m. No discounts are offered and bad debts are currently 2% of the sales but the company expects it to increase to 3% under the new terms. The company can borrow short- term funds at a rate of 15%, invest at the same rate and has a gross profit margin of 12%. Determine whether it would be worthwhile for the company to change its credit terms. Shocks Ltd sells shock absorbers to mechanical workshops on credit only. The management of the company estimated that it could increase sales by offering better credit terms. Currently, the days sales outstanding (or average collection period) is 30 days. It is expected that this will change to 45 days under the new standards. Sales are expected to increase from R150 m to R180 m. No discounts are offered and bad debts are currently 2% of the sales but the company expects it to increase to 3% under the new terms. The company can borrow short- term funds at a rate of 15%, invest at the same rate and has a gross profit margin of 12%. Determine whether it would be worthwhile for the company to change its credit terms.

Answer rating: 100% (QA)

To determine whether it would be worthwhile for Shocks Ltd to change its credit terms we need to cal... View the full answer