Question
BBB Ltd., is considering shortening its credit period from 30 days to 20 days and believes, as a result of this change, its average collection
BBB Ltd., is considering shortening its credit period from 30 days to 20 days and believes, as a result of this change, its average collection period will decrease from 36 days to 30 days. Bad debt expenses are also expected to decrease from 1.5% to 0.5% of sales. The firm is currently selling 300,000 units but believes as a result of the change, sales will decline to 275,000 units. On 300,000 units, sales revenue is $4,200,000, variable costs total $3,300,000, and fixed costs are $300,000. The firm has a required return on similar-risk investments of 15 p.a. Evaluate this proposed change and make a recommendation to the firm.
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