Question

Advise Siyadula if it should change its credit terms. Show all calculations to support your advice....

Advise Siyadula if it should change its credit terms. Show all calculations to support your advice.
INFORMATION
Siyadula Enterprises credit terms are currently 3/10 net 30 days. In order to stimulate sales, the business is considering changing its credit terms to 5/15 net 30 days. The following information relates to the current and proposed terms:

Current Proposed
Selling price R220 R220
Variable costs R80 R80
Debtors collection period 40 days 35 days
Credit sales 12 000 units 15 000 units
Bad debts 2% of sales 1% of sales
Percentage of customer who make used of the discount 40% 60%
Required rate of return 16% 16%
Business   Accounting   
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Answer #1
Current Propsed
Selling Price 220 220
Variable Cost 80 80
140 140
Credit Sales Units 12000 15000
Sales Value 2640000 3300000
Variable Cost 960000 1200000
Net Revenue on sales 1680000 2100000 (A)
Bad Debts 2% 1% 52800 33000 (B)
Discount estimate 40% 60% 1056000 1980000
3% 5% 31680 99000 ©
Net Profit 1595520 1968000 (A-B-C)
Rate of Return 60% 60%

Since the rate of Return on sales is same but value of earnings are more in proposed credit terms
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