Pincer plc is hoping to increase sales by granting its customers longer payment
periods. Its annual sales currently stand at € 1m and it gives its customers an average of 30 days to pay.
(a) The company made the following assumptions when defining its customer credit policy.
| Extension of payment period (days) | Increase in sales (€) |
| 15 | 400,000 |
| 30 | 600,000 |
| 45 | 700,000 |
| 60 | 750,000 |
The sales price of a manufactured unit is € 4 and the cost price is € 3.2, including € 1 in fixed costs. What policy should the company introduce if it requires a 20% return (before tax) on its capital invested (its inventories are financed through supplier credit)?
(b) Pincer has also made the following forecasts for bad debts:
| Extension of payment period (days) | Bad debts (sales, %) |
| 15 | 2 |
| 30 | 4.5 |
| 45 | 7 |
| 60 | 12 |
Bad debts currently only account for 1.2% of debts. Which policy should the
company introduce?
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