Financial planning

A company is contemplating a change in its credit policy that is expected to increase its bad debt expense from 1 percent to 3 percent of sales. Current sales are 25,000 units; selling price per unit is Rs 11 and the variable cost per unit is Rs 7. The firm expects to sell 27,000 units. For the same:

a. Calculate bad debts under the present and proposed plan

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b. If the firm expects savings of Rs 3,500 from the proposed plan, would you recommend its implementation?

A company currently sells goods on credit but offers no cash discount. The company is contemplating on offering a discount of 2 percent for payment prior to 15 days. The current ACP is 60 days; sales are 20,000 units; selling price is Rs 22 and variable cost is Rs 18. The company expects 70 percent of its customers to take cash discount if it initiated the new policy; sales to increase to 21,000 units; the ACP to drop to 45 days and bad debt expenses to remain at zero.

If the cost of capital is 20 percent, should the company offer discount?

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