Read the attached case and answer the following questions:
Q. If any proposal that might reduce Sales were to be implemented, what other costs/problems might be considered?
Campagnola products, a wholesaler of ethnic food products, has seen a steady increase in its Average Collection Period (ACP), and an increase in bad debt losses over the past couple of years. Management has decided to address this problem by considering a change in its credit terms that are expected to improve collection times and also reduce bad debt losses. Currently, Campagnola provides trade credit on terms of n/60. While the majority of customers pay (on average) in the allowed 60 days, about 40% of customers are paying 10 days late. Bad debt losses, which once averaged about 1%, have risen to 2% on average A management consultant, hired by Campagnola, has recommended two possible changes to the credit terms. Proposal A: Offer a discount of 1% for early payment in 10 days (Terms of 1/10, n/60) Proposal B Offer the discount, but reduce the net payment time (Terms of 1/10, n30) If Proposal B is accepted, it is assumed that sales will decrease by 8% relative to what is expected under the existing policy; changes in Inventory are assumed to be proportional to changes in Sales. If Proposal A is accepted, no reduction in Sales is expected. Under either proposal, bad debt losses are expected to go back down from 2% to the 1% seen in earlier years. If either proposal is accepted, it is expected that 50% of all customers will take the discount and pay in 10 days. Among those who do not take the discount, it is assumed that 60% will pay on time and 40% will pay 10 days late Campagnola has a Cost of Capital of 11.2% Campagnola products, a wholesaler of ethnic food products, has seen a steady increase in its Average Collection Period (ACP), and an increase in bad debt losses over the past couple of years. Management has decided to address this problem by considering a change in its credit terms that are expected to improve collection times and also reduce bad debt losses. Currently, Campagnola provides trade credit on terms of n/60. While the majority of customers pay (on average) in the allowed 60 days, about 40% of customers are paying 10 days late. Bad debt losses, which once averaged about 1%, have risen to 2% on average A management consultant, hired by Campagnola, has recommended two possible changes to the credit terms. Proposal A: Offer a discount of 1% for early payment in 10 days (Terms of 1/10, n/60) Proposal B Offer the discount, but reduce the net payment time (Terms of 1/10, n30) If Proposal B is accepted, it is assumed that sales will decrease by 8% relative to what is expected under the existing policy; changes in Inventory are assumed to be proportional to changes in Sales. If Proposal A is accepted, no reduction in Sales is expected. Under either proposal, bad debt losses are expected to go back down from 2% to the 1% seen in earlier years. If either proposal is accepted, it is expected that 50% of all customers will take the discount and pay in 10 days. Among those who do not take the discount, it is assumed that 60% will pay on time and 40% will pay 10 days late Campagnola has a Cost of Capital of 11.2%
