You recently finished studying for a bachelor of Financial Management. James knows that you have gained a vast amount of knowledge whilst studying and is therefore seeking your advice. James informed you that his cellphone shop is doing quite well. He does, however, want to attract more customers.

James cellphone shop sells a new type of cellphone for R800. His variable cost per cellphone is R550. You informed James that he needs to investigate extending his customers payment period from 45 days to 60 days. This is a good way to attract more customers.

After giving this idea some thought, James informed you that if he implements the new credit policy, he believes his credit sales will increase from 720 cellphones per year to 900 cellphones per year. He also informed you that if he implements the new policy, it will, however, increase bad debts from 5% of credit sales to 8% of credit sales.

4.1 Calculate the effect on profit if the new policy is adopted. Show all your workings. (3 Marks)

4.2 Calculate the effect on bad debts if the new policy is adopted. Show all your workings. (5 Marks)

4.3 Calculate the cost of marginal investment in accounts receivable if the new policy is adopted. Show all your workings. (8 Marks)

4.4 Calculate the net effect of the new policy and advise Uncle Petrus if he should implement the new policy or not. Show all your workings. (5 Marks)