Kit Question

A company is considering increasing its credit period to customers from one month to two months. Annual revenue is currently $1,200,000. It is expected that the increased credit period would increase sales by 25% and result in an increase in profit of $45,000, before any INCREASE in finance charges have been taken into account. The company's cost of capital is 10% What is the financial effect of this proposal, after taking into account any increase in finances charges? A Increase in profit of $35,000 B Decrease in profit of $35,000 C Increase in profit of $30,000 D Decrease in profit of $30,000 Answer is C. Please explain this too.

Please ask only one question in a thread. Q1 sales = 450,000 COS = 70% X 450,000 = 315,000 COS = OS + PURCHASES - CS Purchases = COS + CS - OS = 315000 + 18000 = 333,000 Payable decreases 10,000, so 10,000 more was paid for than purchased. Payments = 343,000

Q2 Current receivables 1,200,000/12 = 100,000 New receivables = 1,200,000 x 1.25 x 2/12 = 250,000 Effectively the company has 250,000 - 100,000 = 150,000 with customers, not in its bank account. If cost of capital is 10% this costs 10% x150,000 = 15,000 to finance. Increase in profit after finance charges is therefore 45,000 - 10,000= 30,000

Thank you sir. And surely will take care not writing two questions in one thread.