Pincer plc is hoping to increase sales by granting its customers longer payment periods. Its annual sales currently stand at €1m and it gives its customers an average of 30 days to pay.

The company made the following assumptions when defining its customer credit policy.

The sales price of a manufactured unit is €4 and the cost price is €3.2, including €1 in fixed costs. What policy should the company introduce if it requires a 20% return (before tax) on its capital invested (its inventories are financed through supplier credit)?

b) Pincer has also made the following forecasts for bad debts:

Bad debts currently only account for 1.2% of debts. Which policy should the company introduce?

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Extension of payment period 15 days 30 days Increase in sales 400,000 600,000 45 days 60 days 700,000 750,000