The Directors of Company A are considering changing their credit policy to attract customers who have moved to competitors whose general credit policy 3/30 net 30. The current credit policy calls for 2/10 net 30. All sales are on credit and at present half of the customers (by Value) use the discount facility. The new policy would call for 3/30 net 35. The directors expect that this new credit policy will resuly in 70% of customers (by Value) taking the discount. The Directors forecast that bad debts will increase from the present level of 2% to 3% of credit sales. Credit sales are anticipated to increase from R500 000 per annum to R600 000 per annum based on the new credit policy. Gross profit margin will remain unchanged at 20%. The opportunity costs associated with an investment in working capital is 16%. The outlet purchases under terms of 3/10, net 30. The directors however feel that the delay would not incur any penality.
1. Establish whether or not the proposed credit policy should be implimented.
2. Calculate the effective cost of trade creditor finance.
kindly show all calculation steps.
Subject: working capital management