Company XYZ it planning to relax its credit term from 30 days to 40 days. However, this will increase the bad-expenses as percentage of sale by 50%. The company hopes to increase its profit through this relaxation of credit term. Sale is expected to increase by 2.5% from the current 70,000 units of sales for the product priced of $12,00 Additional information includes; variable cost equals $6.00 per unit, fixed cost is $120,000, and current expenses as percentage of sales is 1%.
If the cost of tying up money in receivables is 15%, should company go ahead with the relaxation of the credit term? (All calculations must be shown, without calculations, no marks will be given).