Calculate relaxation of credit standards

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Reference no: EM132770867

PT Tani Mukti, a firm specializing in fertilizers, currently sells on credit only and does not offer any discounts.

It has sales ...... (decide by yourself) units in the current period.

The credit period is ...... (decide by yourself) days.

The average collection period is ....... (decide by yourself) days, and bad debts are 2 % of sales.

Problem 1: The selling price per bag is $ 15, and the variable cost per bag is $ 12. The required rate of return on equal-risk investments is 20 %. To improve working capital management in the coming period, the company plans to create several program scenarios. Calculate and analyze on the each following scenarios, then which scenario should be implemented and why ? These scenarios are (Note: Use a 365-day year) :

a. Relaxation of credit standards

  • The plan is expected to result increase 10 % in sales
  • Average collection period will increase 50 %
  • Bad debts are expected to increase to 5 % of sales.

b. Initiating a 5 % cash discount for payment within 15 days

  • Sales will increase 15 %, and 80 % of sales will take the discount
  • Average collection period will fall 50 %

c. Shortening the credit period by 30 %.

  • It is estimated will reduce the average collection period 10 %
  • The bad debts are expected to decrease to 1% of sales
  • It is believed that sales will decline 10 %

d. Lengthening the credit period 50 %

  • All customers will continue to pay on the net date
  • The proposal is expected to increase credit sales by 10 %
  • However, bad debts are expected to increase 4 % of sales

Reference no: EM132770867

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