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All the sales of Greedy Ltd are on credit. It is considering a proposal to change its credit policy from allowing debtors credit of 2 months to credit of 3 months.
Sales are currently $600,000 p.a. and as a result of the proposed change, it will increase by 15%.
The contribution/ sales ratio is 20% and the cost of financing working capital using overdraft is 10%.
Currently bad debt is 1% of sales. After the new policy it is expected to be 2% of sales.
Requirements:
Calculate and comment whether the credit policy change is financially viable or not.
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