question archive 1) Your firm is considering a new credit policy
1) Your firm is considering a new credit policy
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1) Your firm is considering a new credit policy. While its current policy is cash only, the new policy would involve extending credit for one period. Based on the following information determine if a switch is advisable if the interest rate is 2.0 percent per period.
Current Policy New Policy
Price per Unit Tshs 1,750 Tshs 1,750
Cost per Unit Tshs 1,300 Tshs 1,300
Sales per Period (Units) 10,000 11,000
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Solution....
Here Profit under new policy:
Sales per period = Sales in units*Price per unit = 11,000*1,750 = 19,250,000
Cost per period = Sales in units*Cost per unit = 11,000*1,300 = 14,300,000
Interest cost = Sales per period*interest rate = 19,250,000*2% = 385,000
Profit = Sales per period - Cost per period - Interest cost = 19,250,000 - 14,300,000 - 385,000 = 4,565,000
Profit under current policy:
Sales per period = Sales in units*Price per unit = 10,000*1,750 = 17,500,000
Cost per period = Sales in units*Cost per unit = 10,000*1,300 = 13,000,000
Profit = Sales per period - Cost per period = 17,500,000 - 13,000,000 = 4,500,000
Incremental benefit over current policy = Profit under new policy - Profit under current policy = 4,565,000 - 4,500,000 = 65,000
