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Pitch Inc.'s sales for 2017 were €8 million. Costs of goods sold (or costs of sales) were 80% of sales. Bad debts were 2% of sales. Costs of sales variable costs were 90% and fixed costs 10%. Pitch Inc. allows its customers 60 days' credit, but is now considering increasing this to 90 days' because it believes that this will increase sales. Thus, Pitch Inc.'s cost of finance would be 10% per annum.
Pitch Inc.'s sales manager estimated that if customers were granted 90 days' credit, sales may be increased by 20%, but that bad debts would increase from 2% to 3%. The finance director calculated that such a change in policy would not increase fixed costs, and neither would it result in changes to creditors and stock.
Required:
1. Determine the contribution margin ratio, thereafter the total gain in contribution margin?
2. Would you recommend that Pitch Inc. increase customer credit to 90 days?
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