Suppose that a steel mill has been selling to customers on terms of net 30. The firms is considering extending the credit terms to net 45 in an effort to increase sales. Why would extending the credit terms increase sales? Longer credit terms provides liquidity for customers. Extending the credit terms will lower the cost of financing for the steel mill. The change will shorten the steel mill's DSO and cash conversion cycle. Extending the credit terms to net 45 will result in lower interest rates when the steel miill's customers borrow from their banks.
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This can be appealing to customers who may need more time to generate revenue from the steel they purchase before making a payment. Show more…
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Texts: Question 1 Fastek Pvt Ltd has been using the same credit policy for the past five years; however, all its competitors have since migrated to new policies. As a result, Fastek has lost a chunk of its market share. The company sells all its products on credit, and the opportunity cost of investing in working capital is 25%. You have been hired as a consultant to help improve the situation. The finance executive, in briefing you, points out that they were also considering reorganizing the company's credit management system. The following data is provided for your perusal: Item Current Policy Proposed Policy Sales (units) 115,000 145,000 Price/unit $30.00 $50.00 Early payment discounts 2.5/15 net 25 5/20 net 35 Variable cost ratio 20% 30% Bad debts 6% 2% Percentage taking early discounts 22% 40% Determine the potential change in contribution for Fastek Pvt Ltd. (4 marks) Calculate the potential increase/decrease in early discounts to be brought by the new policy. (4 marks) Compute the potential increase/decrease in bad debts emanating from the proposed policy. (4 marks) How much extra cost is the company going to incur in carrying book debtors if it adopts the new credit policy? (4 marks) Advise the company on whether to adopt or not, the proposed credit policy giving reason(s). (4 marks)
Akash M.
Impact on Domestic Steel Price: The export subsidy results in a decline in the domestic steel price as it stimulates increased supply, it exerts downward pressure on the domestic price of steel by strengthening its supply in the market. This tends to stimulate the quantity of steel produced domestically, a consequence of the incentive structure provided by the subsidy. Steel Production Quantity: The subsidy encourages higher domestic steel production, leading to an upsurge in the quantity produced. Steel Consumption Quantity: With a reduced domestic steel price, there is a likelihood of increased consumption domestically. Exported Steel Quantity: The subsidy's primary goal is to amplify steel exports, consequently elevating the quantity of steel shipped to foreign markets. Consumer Benefit: Consumers enjoy expanded surplus due to the lower domestic steel prices prompted by the subsidy. Producer Outcome: Export-focused producers witness augmented revenues, while those catering to the domestic market may face heightened competition, influencing their surplus. Government Financials: The government bears costs from subsidizing steel exports, which might outweigh potential gains from heightened tax revenue. Efficiency Evaluation: From an efficiency perspective, export subsidies may disrupt resource allocation by favoring a specific industry, potentially causing inefficiencies compared to policies advocating fair competition in the global market.
Crystal W.
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