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For the past few years Fabio company has been making sales on net-30 terms. Annual credit sales current stands at shs. 72 million and it takes an average of 60 days to collect receivables. To speed up collection, the company is considered offering 2/10 net 30. It anticipates that credit customers taking advantages of the discount will present 40% of the sales volume and average collection period will be shortened by 25 years. However the change will not affect the volume of credit sales. Assuming a year with 360 days and 12% as cost of capital for Fabio.
Question (a) should the new credit policy be adopted?
Question (b) for each of the following variables, determine the level that is needed for the new credit policy to break-even
i) the average collection period
ii) proportion of sales for customers taking up the discount
iii) credit sales( assume a net profit margin of 5%)s
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