The Star Company is considering a change in its credit terms to increase sales. Its current credit sales are $8.5 million per year and its present credit terms are 2/16 net of 20 basis. Discount is on 12% of credit sales. The average collection period is 30 days and bad debt is 2.5% on total credit sales.

The company intends to increase its credit terms to 3/12 net of 30 days, discount expected to be claimed on 18% of credit sales resulting in reduction in the rate of bad debts to 2% and the average collection period to 22 days.

Sales are expected to increase to $9.7 million. The increased sales would require an increase in working capital amounting to 30% of sales. Star's ratio of variable cost of sales is 78%. Cost of capital of Star is 12% pa.

Advise the directors of Star Company in the mater of credit policy.

Answer rating: 100% (QA)

Answer Analysis of Star Companys Credit Policy Change Current Credit Policy Credit Sales 85 million Terms 216 net 20 2 discount for payment within 16 ... View the full answer