QUESTION FOUR

a$)$ A firm is considering changing its credit terms from "net $30"$ to "net $60."$ The bad$-$debt losses are expected to remain at $2$ per cent of sales. Incremental production, selling and collection costs are $70$ per cent of sales and expected to remain constant over the range of anticipated sales increases. The relevant opportunity cost for receivables is $15$ per cent. Current credit sales are Kshs $200,000$ and current level of receivables is Kshs $20,000.$ If the credit terms are changed, the current sale is expected to change to $\text{'}$Kshs $260,000$ and the firm's receivables level will also increase. The new credit terms will cause the firm's collection period to increase by $30$ days. Calculate the present collection period and the collection period after the proposed change in credit terms. What level of receivables is implied by the new collection period? Determine the increased investment in receivables if the new credit terms are adopted$(18$ marks$)$