Question
A firm has current sales of kshs 200 million. The firm has unutilised capacity: therefore, with a view to boost its sales, it is considering
A firm has current sales of kshs 200 million. The firm has unutilised capacity: therefore, with a view to boost its sales, it is considering lengthening its credit period from 30 days to 45 days. The average collection period will also increase from 30 to 45 days. Bad debts are expected to remain constant at 3 percent of sales. The firm's sales are expected to increase by Kshs 36 million. The variable administration, production, and selling costs are 70 percent of sales. The firm's corporate tax is 35 percent and it requires an after-tax return of 15 percent on its investments. Should the firm change its credit period?
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