QUESTION ONE

Management of JT limited is considering changing the credit policy to attract

customers, who have moved to competitors with more favourable terms. The

firm, which sells goods on credit presently sells $160000$ units at a price of $$42$

per unit. The credit policy would result in an increase in the number of units to

$180000$ but the price will remain the same. The present terms offered by the

firm are $2/10$ net $22.$ The suggested credit terms are $5/15$ net $40.$ At present

$20\%$ of the customers take advantage of the $2\%$ discount. With the new policy

it is expected that $35\%$ of the customers will take advantage of the new

discount. The average collection period is expected to increase from the current

$22$ days to $40$ days. The variable cost ratio is seventy percent and it is expected

to remain unchanged. The bad debt losses are expected to change from six

percent to two percent of sales for which cash discounts are not taken. The

opportunity cost associated with an investment in working capital is thirty five

percent.

Required

Evaluate the new policy and advice the company on whether to implement it or

not, giving reasons. $(20$ marks$)$