2. The Swink Company expects to have sales of $20 million this year under curren

Question

2. The Swink Company expects to have sales of $20 million this year under current operating policies. Its variable costs as a proportion of sales are 0.8, and its cost of receivables financing is 8%. Currently, the firm’s credit policy is net 25. However, its average collection period is 30 days, indicating that some customers are paying late, and its bad debt losses are 3% of sales.

     Swink’s credit manager is considering the following alternative credit policy:

Proposal: Lengthen the credit period to net 40. If this were done, it is estimated that sales would increase to $20,500,000, that days sales outstanding would increase to 45 days, and that bad debt losses on the incremental sales would be 5%. Existing customer bad debt losses would remain at 3%.

Based on your calculation, should the manager adopt this new credit policy?

Explanation / Answer

Statement showing comparative analysis

Since profit is increaseing one should adopt new plan

Particulars Current proposed Sales 20000000 20500000 VC (80%) 16000000 16400000 Contribution 4000000 4100000 Cost of receviables financing 1600000 1640000 Bad debt 600000 625000 Profit 1800000 1835000

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