Question
A software developer company is selling its unique product model for $100.00 a unit. Sales are at the level of 30,000 units annually. For commercial
A software developer company is selling its unique product model for $100.00 a unit. Sales are at the level of 30,000 units annually. For commercial reasons, 95% of sales are made on installments. The unit variable cost is $60.00 and the total fixed cost is $400,000 per year. The company is looking to ease credit standards by increasing the average collection period from its current level of 35 days to 49 days on average. With this measure, it is expected an increase of 20% in sales and an increase in the current level of bad debts from 2% to 3% on credit sales. Due to a lack of working capital, the company usually discounts trade bills to anticipate 75% of receivables (on credit sales). The simple interest rate that banks charge for discounting trade bills is 2% per month (single discount). Should the company relax its standards for granting credit? Demonstrate.
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