Reference no: EM133171179

Question - Tesla. Inc contemplating two alternatives to manage their working capital. The first alternative is by relaxing its credit standards to encourage more sales. It reported total sales of USD 1,500,000 with 75% of the sales of credit. It takes 50 days to collect accounts receivable. The management is currently investigating a change in collection period which expected to result in a 15% increase in credit sales and a 10% increase in the average collection period. Bad debt will also increase, from 1 % to 3% of sales. The variable cost for each product is USD 12.5. The Tesla's opportunity cost on its investment in account receivable is 12.5%. (Assume 1 year: 365 days)

Required -

1. Calculate the minimum price of the product (selling price) that avoid Tesla from getting loss!

2. Instead of setting minimum price, Tesla focusing on the expected increase of the credit sales to get profit. If the price of the product is USD 15, how much minimum increase of the credit sales need to be achieved by Tesla (in percentage)?

3. In the condition that Tesla setting the product price 16 USD and the expected increase in credit sales by 20%, what is the maximum credit bad debt that Tesla still can afford for avoiding loss?

4. In your opinion, is credit relaxation is a good strategy for current condition (pandemic Covid-19)? Please elaborate your answer!