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Credit Policies Should you adopt either the policy? Why?

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2. Your company is considering a modification to your credit policy, as follows:

Policy C-1
Increases sales $5 million per year
Average collection period for incremental sales = 45 days

No bad-debt losses are expected.

The company's variable cost of sales is 80%.

Cost of capital is 20%

Should you adopt either the policy? Why?

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Solution Preview

Increased sales = 5 million
Increase in receivables = 5 million *45/360= 0.625 ...

Solution Summary

Reasoning and computation given.

See Also This Related BrainMass Solution

Credit Policy: Should a More Stringent Policy Be Adopted?

As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 6 percent. He believes that imposing a more stringent credit policy might reduce sales by 5 percent and reduce the bad debt ratio to 4 percent.

If the cost of goods sold is 80 percent of the selling price, should Mr. Procrustes adopt the more stringent policy?

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