Happy holdings is a manufacturer of a wide range of textile products. Owing to severe economic conditions, a tightening in credit standards is planned

The firms required rate of return amounts to fifteen % . Assume a 365-day year.

The strategy revolves around a plan to offer a discount of 5% if payment is made 10 days after the sale took place. The current debtors collection period of 50 days should decrease under the new plan to 40 days. Bad debts will decrease from its current level of 2% to 1% of total sales.

The marketing department has estimated that annual sales will increase from 20 million units to 21 million units. Cash sales will amount to 20% of total sales and 50% of debtors will take the discount. According to the production manager, the selling price of R40 and variable cost of 60% on the selling price per unit will remain constant, whilst a once off saving in the production process will amount to R2 000 000.

Calculate and confirm if proposal to tighten the credit standards should be adopted/accepted. Show all workings clearly