OBA Ltd. has current sales of GH10m per year. Cost of sales is 75% of sales and bad debts are 4% of sales. Cost of sales comprises 80% variable costs and 20% fixed costs, while the companys required rate of return is 12%. OBA Ltd. currently allows customers 60 days credit. In recent times, OBA Ltd. has been facing liquidity problems and plan of changing its current credit policy. There are three proposals that OBA Ltd. is considering and hope will improve the companys liquidity situation.

Proposal 1 OBA can decrease credit period to 30 days. It has been estimated that this change in policy will decrease sales by 15 percent and bad debts will decrease from 4% to 1%.

Proposal 2 Introduce early settlement discount of 1.5% on accounts that are settled within 10 days in which invoice is sent while the current credit period is maintained. It is estimated that 60% of accounts will be paid within the discount period and that will reduce the original bad debt by 60%.

Proposal 3 A factor has offered to take over administration of the receivables ledger and collections for a fee of 2% of the credit sales. This will be a non-recourse factoring service. It has also guaranteed to reduce the payment period to 30 days. It will provide finance for 75% of the trade receivables, at an interest cost of 8% per year. It has been estimated that the factors services will save the company a credit department expense and debts expense of GH1,500 per month. With all the three proposals, it is not expected that the policy change will result in an increase in fixed costs and creditors and stock will be unchanged.

Required You are required to determine which alternative should be selected