Q2A) Credit Period

• Credit Sales = $24mn per year
• Credit Terms = net / 30
• Profit Margin = 20%
• Level of A/R = Credit Sales / Avg. Rec. Turnover, ARTO= 360 / Credit Period
• Marketing Dept comes and says that if you increase net / 30 to net / 60 then sales will increase by $6 million.
• Borrowing rate = 20%
• What do you do?

Q2B) Discount

• Sales = $24m
• Credit Terms = 2/10, net/30
• Borrowing rate = 17%
• 30% customers will avail discount and 70% will not avail. Is this a viable proposition?