Question
Dickson City Company has annual sales of $5 million, while the cost of goods sold is $3.2 million. All sales are made on a cash
Dickson City Company has annual sales of $5 million, while the cost of goods sold is $3.2 million. All sales are made on a cash basis. The owner of Dickson has come up with the plan of giving credit to the customers. He believes that this will increase the sales by 25% without increasing any of the fixed costs. He thinks that 20% of the customers will pay within 30 days, 40% within 60 days, 37% within 90 days, and 3% of the customers will default on the sales. The cost of capital to Dickson is 12%.
(A) Should Dickson City introduce the policy of credit sales?
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