Reference no: EM132613840
Lucid Ltd is a competitive golf pro shop in the Hype Park area. They sell golf clubs and accessories, but also provide golf lessons by professional golfers who have retired. Currently, 58% of Lucid's sales are on credit. They are, however, experiencing problems with collecting their accounts receivable and have high levels of bad debt. To rectify this problem, they are considering changing their credit policy. You have been approached for your opinion on the proposed change. Lucid's current credit policy is 5/12 net 45, and the proposed credit policy is 6/10 net 60. Under the current policy, only 15% of customers who use the credit facility take up the cash discount. Under the new policy, 25% of customers will make use of the cash discount. The more lenient credit policy will result in an increase so that 70% of sales will be on credit. Under the new policy, the average collection period will increase from 44 days to an estimated 58 days. Total sales under the current policy amounts to R2,7 million, which will increase to R3,2 million with the new policy. The gross profit percentage will remain unchanged at 14%. An opportunity cost of 18% is involved, with an investment in accounts receivable. Bad debts amounted to 7% of credit sales under the old policy and will change to 2,5% of total sales under the new policy. Assume a 365-day year. Round off calculations to no decimals.
1) Calculate the change in gross profit due to the new credit policy.
2) Calculate the investment in accounts receivable under the current policy.
3) Calculate the investment in accounts receivable under the new policy.
4) Calculate the effect that the cost of the marginal investment in accounts receivable would have on net income.
5) Calculate the bad debts under the current policy.
6) Calculate the bad debts under the new policy.
7) Calculate the effect the cost of marginal bad debts would have on the net income.
8) Calculate the effect that the marginal cost of the cash discount would have on net income.
9) Calculate the overall effect of relaxing credit standards on the net income of Lucid Ltd.