Reference no: EM133130621

Question - Assume that your firm is considering relaxing its current credit policy. Currently the firm has annual sales, all credit, of P16 million and an average collection period of 30 days. The firm is considering a change in credit terms from the current terms of net 30 to 1/30 net 60. The change is expected to generate additional sales of P2 million. The firm has variable costs of 75% of the selling price. The information provided here, plus additional information, is summarized in the table below. New sales (all credit) P18,000,000 Original sales (all credit) P16,000,000 Contribution margin 25% Percent bad debt losses on new sales 6% New average collection period 45 days Original average collection period 30 days Additional inventory investment P50,000 Pre-tax required rate of return 15% New percent cash discount 1% Percent of customers taking the discount 50% If the credit policy change is made.

1. What the change in bad debt losses?

A. P120,000

B. P180,000

C. P160,000

D. P90,000

2. What the change in the cost of the cash discount?

A. P90,000

B. P100,000

C. P110,000

D. P80,000