Change in Credit Policy

BACAY Company is considering to change its credit policy from 2/10, n/30 to 2/15, n/45. This change would push to 20CY sales to reach P48 million, or an increase of 20% from last years. Ninety percent of total sales would be in credit. Eighty percent of credit customers are expected to avail of the discount. Accounts receivable at the end of the year are estimated at 15% of sales. Variable costs ratio shall be maintained at 75%.

In relation to changing the credit terms, collection costs would increase by 10% of the incremental sales. Doubtful accounts are expected to increase from 1% to 2.75% of credit sales. The effective rate of return on a given investment is determined at 12%.

Required: Should Robert Company change its credit Policy in 20CY? Show your solution.

Change in Collection Policy

RBRB Corporation is studying a proposed collection system that will decrease collection period from 45 days to 30 days. To do this, administrative costs in relation to collection activities are expected to increase by 30% of net sales, which is projected to remain at P30,000,000. The effective rate of return prevailing in the market with the same type of investment risk at 12%.

Should RBRB Corporation institute the change in the collection system? Prove.