Reference no: EM133178881

Questions -

Q1. ABC Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order to speed collections. At present, 40 percent of ABC Company's customers take the 2 percent discount. Under the new term, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore bad debt losses are not expected to rise above their present 2 percent level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per year. ABC Company's variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm's income tax rate is 40 percent. What are the days sales outstanding (DSO) before and after the change of credit policy?

Q2. What is the opportunity cost of keeping a cash balance of P2 million, if the daily interest rate is 0.02% and the average transaction cost of investing money overnight is P50?