Answered step by step
Verified Expert Solution
Question
1 Approved Answer
JANUARY/FEBRUARY 2020 Question 2 [25 marks] Question 2.1 (9 marks) Shocks Ltd sells shock absorbers to mechanical workshops on credit only. The management of the
JANUARY/FEBRUARY 2020 Question 2 [25 marks] Question 2.1 (9 marks) Shocks Ltd sells shock absorbers to mechanical workshops on credit only. The management of the company estimated that it could increase sales by offering better credit terms. Currently, the days sales outstanding (or average collection period) is 30 days. It is expected that this will change to 45 days under the new standards. Sales are expected to increase from R150 m to R180 m. No discounts are offered and bad debts are currently 2% of the sales but the company expects it to increase to 3% under the new terms. The company can borrow short- term funds at a rate of 15%, invest at the same rate and has a gross profit margin of 12%. Determine whether it would be worthwhile for the company to change its credit terms
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started