Question
MC has current sales of 1.5m per year. Cost of sales is 75 percent of sales and bad debts are 1 percent of sales. The
MC has current sales of 1.5m per year. Cost of sales is 75 percent of sales and bad debts are 1 percent of sales. The cost of sales comprises 80 percent variable costs and 20 percent fixed costs, while the companys required rate of return is 12 percent. MC currently allows customers 30 days credit but is considering increasing this to 60 days credit in order to increase sales. It has been estimated that this change in policy will increase sales by 15 percent, while bad debts will increase from 1 percent to 4 percent. It is not expected that the policy change will result in an increase in fixed costs and creditors and stock will be unchanged. Should MC introduce the proposed policy?
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