Page 77 - DBP5043

QUESTION 2

Jaya Bhd has credit terms of 2/10 net 30. During the year, average sales
for the company was RM10 million and the average collection period is 35
days with 5% of customers taking the discount. The level of current stock
holding is RM50,000 and bad debt expense is estimated to be 1% of gross
sales.

Recently, the company has listed a number of credit policy to be reviewed
by a higher authority. Information for those policies are as follows:

Credit Policy A B C D

Credit terms 3/10 net 30 4/10 net 40 5/10 net 50 6/10 net 60
Increase in 2.0 2.5 2.8 3.0
sales levels
('000,000)

Average 50 60 90 144
collection
period (days)

% of 10 15 20 25
customers
take discount
Increase of 15 20 25 30

stock from the
current
level (%)
Bad debt 1 1 1 1
expenses (%)

The selling price for the company’s product is RM200 per unit and

variable cost is RM150 per unit. With the required rate of return
of 20%, what is the best credit policy for Jaya Bhd. (1 year =
365 days)