The credit evaluation officer of Jeedi & Company had to decide on a proposal for relaxing of credit which would result in a cutting down the processing pace of the average collection period from 1/12 of the year to 2/12 of the year. The company's selling price, Variable cost and total average cost per unit is Rs.30, Rs.23 and 25 respectively. The relaxation in credit policy was expected to up the level of sales to 125% of existing sales and sales after increase would be Rs3million.The collection charges will also be increased from Rs.0.1million to Rs.0.14 million. The relaxation in credit policy will also increase the bad debt losses from 1 % to 3 %. Cost of additional inventory would be Rs.0.05million because of increase in sales level. The corporate manager aimed at a return of 25% on investment or borrowing.

REQUIRED:

You are required to make relevant calculations to help the credit manager in examining the financial implication of liberalizing the credit policy.