Pincer plc is hoping to increase sales by granting its customers longer payment
periods. Its annual sales currently stand at € 1m and it gives its customers an average of 30 days to pay.
(a) The company made the following assumptions when defining its customer credit policy.
|
Extension of payment period (days) |
Increase in sales (€) |
|
15 |
400,000 |
|
30 |
600,000 |
|
45 |
700,000 |
|
60 |
750,000 |
The sales price of a manufactured unit is € 4 and the cost price is € 3.2, including € 1 in fixed costs. What policy should the company introduce if it requires a 20% return (before tax) on its capital invested (its inventories are financed through supplier credit)?
(b) Pincer has also made the following forecasts for bad debts:
|
Extension of payment period (days) |
Bad debts (sales, %) |
|
15 |
2 |
|
30 |
4.5 |
|
45 |
7 |
|
60 |
12 |
Bad debts currently only account for 1.2% of debts. Which policy should the
company introduce?