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Game Ltd makes annual sales of 120,000 units at Sh10 per unit. The unit variable cost is Sh6. The company is considering changing its credit policy and this is expected to result to a 15% increase in sales. The increase in bad debts expenses is expected to be from 2% to 3% of the sales. Other working capital items apart from accounts receivable are expected to be 25% for the sales. The company incurs credit analysis of 10% of the sales and collection costs of 5% of the sales. The current credit terms are net 30 and the proposed terms are 2/10 net 30. The company expects 20% of the customers to take advantage of the cash discount. The opportunity cost of capital is 12%. Assume a 360-day a year.
Required:
Problem 1: Advice the company on whether or not it should change its credit policy.
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