Wholesalers Ltd. deals in the sale of foodstuffs to retailers. Owing to economic depression, the firm intends to relax its credit policy to boost productivity and sales. The firm’s current credit policy is “net 30” and the average debt collection period is 45 days. The current annual credit amounts to Sh.60 million. The firm intends to change to “net 60” where sales are expected to increase by 25%. Credit and debt analysis costs will increase from the current 2% to 2.5% of credit sales. Bad debts will also increase from the current 1.5% to 2% of credit sales, variable costs account for 75% of sales, and return on assets is 12%. Assume a 360-day year.

Required: 

Advise the company on whether to adopt the new credit policy.

Answer rating: 100% (QA)

A The costs and benefits under the existing terms of credit and under the proposed ter View the full answer