X Ltd. has annual sales of 10,000 units at $300 per unit. The annual fixed costs amount to $300,000. The variable cost is $200 per unit. The current credit period is 1 month. The company is considering a proposal to increase the credit period.

Fixed cost will increase by $60,000 on account of increase in sales beyond 25% of present level. The company plans a pre-tax return of 15% on investment in receivables.

Requirements;

1. Calculate the most paying credit policy for the company.

2. Analyze the results in detail.

Credit period (month) Increase in sales (per cent) Bad debts (per cent) Existing 2 5 3 Proposed 3 30 5