4. Credit standards. A local Estonian company is considering tightening of its credit standards. The only product it offers to customers is a local popular drink called Kalamees. The sales price per bottle is 5 EUR/unit. All sales are directed to export and are credit sales. PK expects to sell 500,000 bottles next year. The variable costs per bottle are 3.5 EUR.

Current credit standards are such that on average the customers pay in 60 days (some customers have longer and some shorter credit periods). According to the new policy, the company introduces uniform credit period for all customers, which is only 10 days. The company forecasts that as the result of policy change the sales decrease by 10%. Moreover, losses from bad debts are expected to decline from current 3.2% level to 1.4% level of total sales revenue.

The company finances its accounts receivables (A/R) by short-term loans that carry 10% interest rate.

Find:

1. Gross profits before and after the policy change
2. The amount invested into receivables before and after the change
3. Change in the financing costs of receivables (using 10% interest rate)
4. Change in the bad debt losses

Finally, try to analyse, should the company change its credit standards based on the information given above.