Upendo Traders Ltd. sells merchandise on credit terms of net 50 while the industrial average credit terms are net 30. The company makes average sales of...

      

Upendo Traders Ltd. sells merchandise on credit terms of net 50 while the industrial average credit terms are net 30.
The company makes average sales of 3 million per annum. The average number of days sales in accounts receivables is 60 days.
The company is considering changing its credit terms to net 30 on all sales. This change of credit terms is expected to result in the following:
• Sales would reduce to sh. 2,600,000 per annum.
• Accounts receivable would drop to 35 days of sales.
Additional information:
1. The variable cost ratio is 70%
2. Corporation tax rate is 30%.
3. Interest on funds invested in accounts receivables is at a rate of 11% per annum.
Assume a 360 – day year.
Required:
With the aid of appropriate computations, assess whether the company should change. Its credit terms to net 30.

  

Answers


Kavungya
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Kavungya answered the question on April 28, 2022 at 09:25


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