Assignment 02
QUESTION1
Sibahle Connectors Ltd is a manufacturer of homemade electronic connectors
and is currently selling each for R120 (all sales on credit). The company is
considering relaxing its credit policy to improve sales and provide credit to its
marginal consumers. Additionally, the company has idle capacity, meaning that
its additional earnings equal the contribution margin on the incremental sales
since fixed costs are constant. Therefore, the firm anticipates that the additional
cost on the additional receivables will result only from the greater number of
bad debts and the opportunity cost of tying up funds in accounts receivable for
a longer period, since the company works around a 365-day cycle. The company
would like to evaluate its decision to relax the credit period and has compiled
the following information:
Sibahle Connectors Ltd’s operating information:
Sales price per unit. R120
Variable cost per unit. R80
Fixed cost per unit. R15
Annual credit sales (2024). R600 000
Collection period. 1 month
Opportunity costs: 16%
The company establishes that if they relax their credit policy, the following will
occur:
· Sales will increase by 40%.
· The collection period on total accounts will be two months.
· The bad debts on the increased sales will be 5%
, REQUIRED.
a. Determine the company’s average unit and total costs for the current and
propose policies
Current annual credit sales = R600 000
Current units = R600 000 ÷ R120 = 5 000 units
Total fixed costs = R15 × 5 000 = R75 000.
Current
Variable cost total = 80 × 5 000 = R400 000.
Fixed cost total = R75 000.
Total cost = R400 000 + R75 000 = R475 000.
Average unit cost = R475 000 ÷ 5 000 = R95.00 per unit