Question
Ratna Garments is thinking of changing its credit policy from net 30 to 2/10, net 30. Under current terms, Ratnas sales are Tk.25.5 million per
Ratna Garments is thinking of changing its credit policy from net 30 to 2/10, net 30. Under current terms, Ratnas sales are Tk.25.5 million per year, collection costs are Tk.150 thousand, and bad debt losses are 2 percent of gross sales. Its average collection period under current policy is 28 days. If Ratna implements the proposed policy, annual sales are estimated to increase by 12 percent. Because of the discount facility, bad debt losses are expected to fall to 1 percent of gross sales. Collection costs, however, are expected to remain unaffected by the proposed policy. Ratna also estimates that 40 percent of customers (by taka value) that pay, will take the discount. The other paying customers will pay on the last day. Ratnas variable cost ratio is 80 percent while its opportunity cost of carrying receivables is 12 percent.
Should Ratna Garments adopt the proposed change? Justify your decision with necessary calculations.
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