• To increase sales from their present annual $ 1.5 million, ABC Company, a wholesaler, may try more liberal credit standards. Currently, the firm has an average collection period of 30 days’ but is considering increasing to 60 days’. The cost of sales is 75 per cent of sales and bad debts are 1 per cent of sales. Cost of sales comprises 80 per cent variable costs and 20 per cent fixed costs. The company finances working capital from an overdraft at a rate of 7 per cent per year. It belives that, with increasingly liberal credit standards, will increase sales by 15 per cent, while bad debts will increase from 1 per cent to 4 per cent of sales. 
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• REQUIREMENT
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• Should ABC introduce the proposed policy?

Answer rating: 100% (QA)

Based on the information provided ABC should not introduce the proposed policy of increasing credit ... View the full answer