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Assume that Cempaka Company Ltd . Has an annual credit sale of Rm 1 6 million and average collection period of 4 0 days. The

Assume that Cempaka Company Ltd. Has an annual credit sale of Rm16 million and average
collection period of 40 days. The level of bad debt is RM 480,000 and the required rate of
return before tax is 16 per cent. Assuming that Cempaka Company Ltd only purchase one
product, it has a variable cost of 70 per cent of the cost price. The company is considering a
change in credit policy to 120 net 60.
If the change is implemented, it is expected that 40 per cent of customers will take the
discount and pay on day 20, while 60 per cent will ignore the discount and pay on day 60. This
will increase the average collection period from 40 days to 44 days. Cempaka Company LTd is
considering making changes because it is expected to generate an additional sales credit of
RM2 million. Although sales from new customers will provide an additional profit, it will also
increase bad debt. It is assuming bad debt on the original sale is consistent and bad debt for
additional sales is 6 per cent. In addition, the average inventory level is RM2 million to
RM2,050,000.
Using marginal analysis, analyze whether the proposed credit policy changes should be
implemented or otherwise.
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