- 15 Marks
FM – L2 – Q113 – Management of receivables and payables
Evaluate the impact of extending credit period on Kofi Oil Mill Limited’s profit, considering sales increase and working capital costs.
Question
The summarised budget of Kofi Oil Mill Limited for the year to 31 December 20X8 is as follows:
| GH¢’000 | GH¢’000 | |
|---|---|---|
| Budgeted sales | 20,000 | |
| Budgeted variable costs | 18,400 | |
| Budgeted fixed costs | 800 | |
| 19,200 | ||
| Budgeted profit | 800 |
The sales manager has proposed that the period of credit allowed to customers should be increased from one month to two months. It is believed that this would increase sales by 15%. All sales are on credit and the cost of capital is 13%. Assume fixed costs will remain constant.
Required
(a) Briefly outline for management the implications of the sales manager’s proposal.
(b) List FOUR factors which should be taken into consideration in determining a policy for the control of credit extended by a company.
(c) Explain FOUR points which should be taken into consideration when granting credit to a particular customer.
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