An aggressive credit manager has taken over Mystic Pop Corporation. Currently, sales are about P21,600,000 a year. The credit manager believes that by establishing credit terms of 2/20, net 30, he can reduce the collection period from 60 days to 20 days, on average. The credit manager expects that 80% the total credit customers will take advantage of the discount and that all the funds received from the receivables can be invested at 15 percent. Moreover, the company expects to reduce its collection costs by P90,000 a year in this new credit policy.
Required: Using a 360-day year, determine the following (show your solution):
1. Receivables turnover before and after the change in the credit policy.
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2. Average receivable balances before and after the change in policy.
3. a Net advantage or disadvantage of the new credit policy.
Problem 2 – Change in the collection policy
The Sandbox Company is planning to increase its level of collection expenditures form the current P250,000 to P400,000, on credit sales of P24,000,000. This move is expected to accelerate payments and increase turnover of receivables from 8 to 12 times and cut bad debts from two percent to one percent of credit sales. The opportunity cost of funds is 12 percent. The company uses a 360-day year in planning and controlling.
Required: Calculate the following (show your solution):
1. Receivables turnover before and after the change in the collection policy.
2. Average receivable balance before and after the change in collection policy.
3. Net advantage or disadvantage of the new collection policy