Question 1 Fastek Pvt Ltd has been using the same credit policy for the past five years, however all its competitors has since migrated to new policies. As a result Fastek has lost a chunk of its market share. The company sells all its products on credit and the opportunity cost of investing in working capital is 25%. You have been hired as a consultant to help improve the situation. The finance executive, in briefing you, points out that they were also considering reorganising the companys credit management system. The following data is provided for your perusal: Item Current Policy Proposed Policy

Sales (units) 115 000 145 000

Price/unit $30.00 $50.00

Early payment discounts 2.5/15 net 25 5/20 net 35

Variable cost ratio 20% 30%

Bad debts 6% 2%

Percentage Taking early discounts 22% 40%

Determine the potential change in contribution for Fastek Pvt Ltd. (4 marks) Calculate potential increase/decrease in early discounts to be brought by the new policy. (4 marks) Compute the potential increase/decrease in bad debts emanating from the proposed policy. (4 marks) How much extra cost is the company going to incur in carrying book debtors if it adopts the new credit policy? (4 marks) Advise the company on whether to adopt or not, the proposed credit policy giving reason(s). (4 marks)