Page 72 - DBP5043

CHANGING THE CREDIT POLICY

a) Estimate CHANGES IN PROFIT:

Total profit will increase or decrease when the credit policy change is directly
related to the level of new sales.

Changes in = Increase x Margin - Increased cost on
Profit in sales contribution disposal of bad debt

b) Estimate the cost CHANGES IN AR INVESTMENT & STOCK:
i. Calculate the change in AR investment:

Change in AR = Level of expected sales x (Expected average sales –
Current sales) x Average collection period

ii. Calculate the increase in stock investment:

Increase in stock = Expected stock level – Current stock level

iii. Calculate the total increase in AR investment and stock:

Increased in AR and Stock = (Increase in AR + increase in stock )
x required rate of return

c) Estimate CHANGES IN CASH DISCOUNT:

The cost of changes = (level of expected sales x % expected discount x
% customer to take the discount) - (level of current sales x % current
discount x % customers take the current discount)

d) COMPARING THE COST OF ADDITIONAL BENEFITS:
Net changes in Changes in - Investment costs - Changes in
in pre tax profits = profits in AR and stock cash discount
(a) (b) (c)