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Solarius Trading Company is considering lengthening its credit period from 30 to 50 days. All customers will...

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Finance

Solarius Trading Company isconsidering lengthening its credit period from 30 to 50 days. Allcustomers will continue to pay on the net date. The firm currentlyhas $300,000 of sales per year, but believes that as a result ofthe proposed change, sales will increase to $360,000. Bad debtexpense will increase from 3% to 5% of sales. The variable cost is70% of sales. The firm has a cost of capital of 12%. Assume a360-day year.

  1. What is the incremental cost of investment in accountsreceivable?
  2. What is the incremental cost of the bad debts?
  3. Should Solarius lengthen its credit period from 30-50days?

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Solarius Trading Company isconsidering lengthening its credit period from 30 to 50 days. Allcustomers will continue to pay on the net date. The firm currentlyhas $300,000 of sales per year, but believes that as a result ofthe proposed change, sales will increase to $360,000. Bad debtexpense will increase from 3% to 5% of sales. The variable cost is70% of sales. The firm has a cost of capital of 12%. Assume a360-day year.What is the incremental cost of investment in accountsreceivable?What is the incremental cost of the bad debts?Should Solarius lengthen its credit period from 30-50days?

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