- 15 Marks
FM – MAY 2018 – L2 – Q4 – Working Capital Management
Evaluates the impact of extending credit terms on a company’s sales, bad debts, and working capital financing costs.
Question
Adjaye Ltd has current sales of GH¢1.5 million per year. Cost of sales is 75% of sales and bad debts are 1% of sales. Cost of sales comprises 80% variable costs and 20% fixed costs, while the company’s required rate of return is 12%. Adjaye Ltd currently allows customers 30 days credit, but is considering increasing this to 60 days credit in order to increase sales.
It has been estimated that this change in policy will increase sales by 15% and bad debts will increase from 1% to 4%. It is not expected that the policy change will result in an increase in fixed costs, and creditors and stock will be unchanged.
Required:
Advise whether Adjaye Ltd should introduce the proposed policy. Support your answer with relevant computations.
Find Related Questions by Tags, levels, etc.
- Tags: Accounts Receivable, Bad Debts, Credit Policy, Financing Costs, Working Capital
- Level: Level 2
- Topic: Working Capital Management
- Series: MAY 2018