Deluge Cosmetics Company Limited is considering changing its credit policy from net 60 to 20 net 45. Its current sales-are 28.00.000 and variable cost to sales ratio is 0.6. Administrative and collection costs are t60.000 and 40.000 respectively. Their present bad debt to sales ratio is 0.01 With the change in credit terms it expects an increase in sales and operating costs by 24000.00 and 120.000 respectively. The new bad debts to sales ratio would be 0.03. Assume 40% of the customer avail the discount and the remaining pay by 60 days amounting to an average collection period of 40 days. Also assume the cost of financing receivables is 14%.

You are required to advise the company regarding the change in credit terms.

Hint: New policy is recommended