Dickson City Company has annual sales of $5 million, while the cost of goods sol

Question

Dickson City Company has annual sales of $5 million, while the cost of goods sold is $3.2 million. All sales are made on a cash basis. The owner of Dickson has come up with the plan of giving credit to the customers. He believes that this will increase the sales by 25% without increasing any of the fixed costs. He thinks that 20% of the customers will pay within 30 days, 40% within 60 days, 37% within 90 days, and 3% of the customers will default on the sales. The cost of capital to Dickson is 12%.

(A) Should Dickson City introduce the policy of credit sales?

Explanation / Answer

Dickson City should introduce the policy of credit sales as there will be saving of $0.13 Million

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