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GEM Beauty sells beauty products to salons in the Western Cape. GEM Beauty's current credit policy is as follows: Credit terms = Net 30 Gross
GEM Beauty sells beauty products to salons in the Western Cape. GEM Beauty's current credit policy is as follows: Credit terms = Net 30 Gross sales = R100,000 80% (of paying customers) pay on Day 30 20% pay on Day 40 Bad debt losses = 5% of gross sales GEM Beauty is considering a change in its credit policy to the following: Credit terms = 2/10, net 20 Gross sales = R120,000 55% (of paying customers) pay on Day 10 35% pay on Day 20 10% pay on Day 30 Bad debt losses = 2% of gross sales Other information: Operating cost ratio = 75% Cost of carrying receivables = 16% Tax rate = 28% Required: 4.1 What is the incremental after-tax profit associated with the change in credit terms? (10) . 4.2 Should GEM Beauty accept the new proposed credit policy? Motivate your answer. (2)
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