Reference no: EM131360190

A local Estonian company is considering tightening of its credit standards. The only product it offers to customers is a local popular drink called "kihisev kalamees". The sales price per bottle is 4 EUR/unit. All sales are directed to export and are credit sales. PK expects to sell 600,000 bottles next year. The variable costs per bottle are 3 EUR. current credit standards are such that 50% of the customers pay in 30 days and the rest of the customers in 60 days. According to the new policy, the company introduces uniform credit period for all customers, which is 20 days. The company forecasts that as the result of policy change the sales decrease by 8%. Moreover, losses from bad debts are expected to decline from current 4% level to 2% level if sales revenue. the company finances its accounts receivables (A/R) by short-term loans that carry 10% interest rate

FIND SOLUTIONS TO (SHOW ALL STAGES OF CALCULATIONS)

a) gross profits before and after the policy change

b) the amount invested into receivables before and after the policy change

c) change in the financing costs of receivable (using 10% interest rate)

d) change in the bad debt losses

e) finally, try to analyse, should the company change its credit standards based on the information given above.