Celtel Malawi is a wholesale supplier of cell phones.

Celtel Malawi is a wholesale supplier of cell phones. As the firm has recently experienced a continuous decline in profitability, a new management team has been employed in an attempt to reverse this trend. One of the issues to be addressed is whether or not the firm’s credit policy should be changed. Currently, the firm’s credit terms are 2/15 net 45; all sales are on credit. Twenty percent of customers take advantage of the discount. A major factor affecting profitability appears to be bad debt losses amounting to 10% of sales for which discounts are not taken. In order to rectify this situation, management is considering a more effective use of discounts to encourage early payment. The new credit terms will be 7/10 net 30. It is expected that this policy will result in bad debts amounting to 2 percent of credit sales. Furthermore, only 30 percent of customers are likely to use the new discount facilities.

Management expects that the new credit policy will increase annual sales from R1.5 million to R1.7 million. It is estimated that the gross profit margin will remain unchanged at 20% and that the opportunity cost is 20%. The increase in sales is also expected to impact the level of stock for Celtel Malawi. The firm uses the EOQ model to determine its average stock level. Unit sales of cell phones will increase from 1 500 to 1 700. The carrying cost per unit is R5 and the ordering cost is R200 per order. Celtel Malawi does not hold buffer stock.

Required

(a) Calculate whether the new credit policy should be implemented or not. Assume 360 days as the number of days in a yea