Solved – Increase sales from their present annual $24 million, Kim Chi Company, a wholesaler, may try more liberal credit standards

Question 1

Increase sales from their present annual $24 million, Kim Chi Company, a wholesaler, may try more liberal credit standards. Currently, the firm has an average collection period of 30 days. It believes that with increasingly liberal credit standards, the following will result:

The price of its products average $20 per unit and variable cost average $18 per unit. No bad-debt losses are expected. If the company has a pre-tax opportunity cost of funds of 30%, which credit policy should be pursued? Why? (Assume a 360-day year)

Answer 1

Question 2

Upon reflection, Kim Chi Company has estimated that the following pattern of bad-debt losses will prevail if it initiates more liberal credit term:

Answer 2

Question 3

Recalculate Problem 1, assuming the following pattern of bad-debt losses:

Answer 3

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