Question

Show computation for this case.

The business firm targets to increase its market share by adjusting its credit standards. With the new standards, the following changes are expected:

Sales will increase by 25%

The collection period will extend by one month

Uncollectible accounts are estimated to be 4% on the incremental sales

The collection costs will increase by P3,400

Below are the given data:

Unit Selling Price                                           P7.00

Unit Variable Cost                                          P4.50

Fixed Cost per unit                                         P1.50

Annual Credit Sales                                        40,000 units

Collection Period                                            3 months

Rate of Return                                                 19%

Question

- Should the proposed change in credit standards be adopted? why and why not, justify your answer.

Answer 1

Particulars	Current	Proposed
Sales Units               (a)	40,000	50,000
Selling Price per unit (b)	7	7
Total Sales (c=axb)	280,000	350,000
Variable Cost (d) @ 4.5 per unit	180,000	225,000
Fixed Cost (e=40000x1.5)	60,000	60,000
Increased Collection Cost (f)	-	3,400
Uncollectable debts (g=(10,000x7x4%)	-	2,800
Loss because of credit extention (h=350000*19%*1/12)	-	5,542
Net Income (i=c-d-e-f-g-h)	40,000	53,258
Net Income % ((i/c)x100)	14.29%	15.22%

*Iassumed that fixed cost is given per unit for 40000 units and rate of return given to consider the interest loss if not taken that into computation for proposed system the net income % will be 16.8%

It is better to implement the proposed standered because it will increse the profit margine