Kilimo Ltd. Manufactures a standard farm implement which it sells to distributors at sh. 100 per unit. The company intends to relax its credit policy...

      

Kilimo Ltd. Manufactures a standard farm implement which it sells to distributors at sh. 100 per unit. The company intends to relax its credit policy which will result in an increase collection period from one month to two months.
The longer credit period is also expected to increase sales by 25%. Variable costs of production are sh. 85 per unit while annual sales are sh. 24,000,000. The increase in sales will result in additional stock of sh. 2,000,000 and additional creditors of sh. 200,000.
The company’s required rate of return is 20%.
Required:
Advise the company on whether or not to extend the credit period assuming:
i) All customers take longer credit period of two months.
ii) Existing customers do not change their payment habits and only the new customers take the full two months credit

  

Answers


Kavungya
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Kavungya answered the question on April 28, 2022 at 08:59


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