New AR = P450,000/10 = P45,000

Increase in AR = P45,000 – P25,000 = P20,000 D

Use the following information to answer the next 5 questions:

Assume that your firm is considering relaxing its current credit policy. Currently the firm has annual

sales, all credit, of P16 million and an average collection period of 30 days. The firm is considering a
change in

credit terms from the current terms of net 30 to 1/30 net 60. The change is expected to generate
additional sales

of P2 million. The firm has variable costs of 75% of the selling price. The information provided
here, plus

additional information, is summarized in the table below.

New sales (all credit) P18,000,000

Original sales (all credit) P16,000,000

Contribution margin 25%

Percent bad debt losses on new sales 6%

New average collection period 45 days

Original average collection period 30 days

Additional inventory investment P50,000

Pre-tax required rate of return 15%

New percent cash discount 1%

Percent of customers taking the discount 50%

5. If the credit policy change is made, the change in bad debt losses will be:

a. P180,000

b. P160,000
c. P120,000 [(P18,000,000 – P16,000,000) x 6%]

d. P90,000

6. If the credit policy change is made, the change in profit will be:

a. P200,000

b. P380,000 (P2,000,000 x 25% - 120,000)

c. P400,000

d. P550,000

7. If the credit policy change is made, the additional investment in accounts receivable will be:

a. P733,333

b. P850,000

c. P916,667 [(P18,000,000 x 45/360) – P16,000,000 x 30/360)]

d. P1,067,333

8. If the credit policy change is made, the cost of the additional investment in accounts
receivable and

inventory will be:

a. P145,000 [(P916,667 + P50,000) x 15%]

b. P137,500

c. P128,000

d. P114,500

9. If the credit policy change is made, the change in the cost of the cash discount will be:

a. P80,000

b. P90,000 (P18,000,000 x 50% x 1%)

c. P100,000

d. P110,000
10. If the credit policy change is made, the net effect (i.e., incremental revenues versus incremental
costs) will

be:

a. P375,000

b. P265,000

c. P145,000 (P500,000 – P120,000 – P145,000 – P90,000)

d. P 85,000