The Hahakdog Company has under study a new credit policy that they believe will increase annual sales from P11 million to P14 million. However, the new plan is also expected to increase bad debt losses from P800,000 to P1.2 million each year. The average collection period on collectable sales is now averaging 90 days. This ratio will increase to 120 days for both old and new sales if this new credit policy is adopted. The increase in sales is expected to increase the company's investment in inventory by P20,000. Assuming a pre-tax required rate of return of 25% and a variable cost-to-sales ratio of 60%, should the Hahakdog Company adopt the new credit policy? Assume a 360-day year.

Answer rating: 100% (QA)

First lets calculate the variable cost of sales for the current and new sales levels Current sales P... View the full answer