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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 Rm million and average
collection period of days. The level of bad debt is RM and the required rate of
return before tax is per cent. Assuming that Cempaka Company Ltd only purchase one
product, it has a variable cost of per cent of the cost price. The company is considering a
change in credit policy to net
If the change is implemented, it is expected that per cent of customers will take the
discount and pay on day while per cent will ignore the discount and pay on day This
will increase the average collection period from days to days. Cempaka Company LTd is
considering making changes because it is expected to generate an additional sales credit of
RM 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 per cent. In addition, the average inventory level is RM million to
RM
Using marginal analysis, analyze whether the proposed credit policy changes should be
implemented or otherwise.
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