Question

QUESTION 3 (8 MARKS) REQUIRED Advise Siyadula if it should change its credit terms. Show all calculations to support your advice. INFORMATION Siyadula Enterprises credit terms are currently 3/10 net 30 days. In order to stimulate sales, the business is considering changing its credit terms to 5/15 net 30 days. The following information relates to the current and proposed terms: Selling price Variable costs Debtors collection period Credit sales Bad debts Percentage of customer who make used of the discount Required rate of return Current R220 R80 40 days 12 000 units 2% of sales Proposed R220 R80 35 days 15 000 units 1% of sales 60% 40% 16%

Answer 1

	Current	Proposed
Selling Price per unit	220	220
Less: Variable Cost Per Unit	80	80
Contribution per unit	140	140
Quantity	12000	15000
Contibution [Quantity*Contribution per unit]	1680000	2100000
Bad Debts as % of Sales	2%	1.00%
Less: Bad Debts [Selling Price per unit*Quantity*Bad Debts %]	52800	33000
Customers who avail discount	40%	60%
Discount	3%	5%
Less: Discount [Selling Price*Quantity*Customers who avail discount*Discount]	31680	99000
Profit [Contribution-Bad Debts-Discount]	1595520	1968000
Collection Period if discount	10	15
Collection Period without discount	40	35
Less: NOTIONAL Interest Cost [{Selling Price per unit*Quantity*Customers who avail discount*16%*Collection period if discount/365}+{Selling Price per unit*Quantity*(1-Customers who avail discount)*16%*Collection period without discount/365}]	32403.28767	33271.23288
Net Gain [Profit-Notional Interest Cost]	1563116.712	1934728.767

Yes, Credit Term should be changed.