XYZ Ltd. provides you the following information in respect of its present debtors policy and proposed debtors policies :
|
Particulars
|
Present Policy
|
Proposed Policy I
|
Proposed Policy II
|
|
Average Collection Period
|
90 days
|
45 days
|
135 days
|
|
Credit Sales
|
$2,500,000
|
$1,500,000
|
$7,500,000
|
|
Required Rate of Return (Pre-tax)
|
20%
|
20%
|
20%
|
|
Bad Debts (%)
|
5%
|
2.5%
|
10%
|
|
Selling Price per unit
|
$500
|
$500
|
$500
|
|
Variable Cost per unit (% of Sales)
|
85%
|
85%
|
85%
|
|
Average Cost per unit
|
$450
|
|
|
Required: Suggest which policy is the best (Assume 360 days in a year)