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Grabbit Quick Co achieves current annual sales of $1,800,000. The cost of sales is 80% of this amount, but bad debts average 1% of total sales, and the annual profit is as follows.

 

  $000
Sales 1,800
Less COGS (1,440)
Gross profit $360
Less bad debts ($18)
Profit $342

 

The current debt collection period is one month, and the management considers that, if credit terms were eased (Option A), the effects would be as follows.
 

  Current policy Option A
Additional sales % - 25%
Average collection period 1 month 2 months
Bad debt (% of sales) 1% 3%

The company has 15% cost of financing working capital. The costs of sales are 75% variable and 25% fixed. Assume there would be no increase in fixed costs from the extra revenue and that there would be no increase in average inventories or accounts payable.

Requirements:

Analyze and comment whether company should stay with current policy or shift to the option A?

Marks: 8

Answers submitted

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Kamrul Hasan's picture
Kamrul Hasan
11/12/2020 - 21:02

10134
8
Kamrul Hasan's picture
Kamrul Hasan
11/02/2020 - 08:57

9988
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Rakhi Gupta's picture
Rakhi Gupta
11/01/2020 - 18:01

9978
8
Rakhi Gupta's picture
Rakhi Gupta
08/13/2020 - 02:21

9366
8
Anik Arbab
02/02/2020 - 20:19

8478
8
Kamrunnahar Takia's picture
Kamrunnahar Takia
02/02/2020 - 20:19

8472
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MD. Ohidur Rahman's picture
MD. Ohidur Rahman
02/02/2020 - 20:19

8476
8
Md. Shadequl Islam Shamim's picture
Md. Shadequl Is...
02/02/2020 - 20:19

8474
8
Md. Tariful Mursalin Rifat's picture
Md. Tariful Mur...
02/02/2020 - 20:20

8480
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Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
02/02/2020 - 20:18

8468
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Tanzeer UL Alaam's picture
Tanzeer UL Alaam
02/02/2020 - 20:18

8466
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Apurba nandy's picture
Apurba nandy
12/04/2019 - 15:14

4529
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Apurba nandy's picture
Apurba nandy
11/28/2019 - 22:57

8250
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Jahirul Kaosar Rakib's picture
Jahirul Kaosar Rakib
09/05/2019 - 00:12

7266
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Tanzeer UL Alaam's picture
Tanzeer UL Alaam
08/23/2019 - 11:19

6998
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hasarul basher pollob's picture
hasarul basher ...
08/21/2019 - 21:41

6974
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Masum Billah's picture
Masum Billah
08/21/2019 - 21:41

6978
8