QUESTION 4 Each month, Jumbo Pty Ltd sells 10 000 units at $25 per unit. The marg inal cost of roducing each unit is $15. At present all of Jumbo's sales are made on a strict cash only basis. Jumbo's manager believes that the cash only' policy has led to many sales being lost as there have been a number of inquiries concerning the possibil ity of credit sales. Jumbo's manager estimates that a credit policy of 1/30, n/60 could increase sales by 1 000 units per month, of which 500 would be paid for at the end of month I and 400 would be paid for at the end of month 2. Of the remaining 100 units, 70 are expected to be paid for a month late and 30 are expected to be bad debts. Administration and collection costs are estimated to be $250(month 0), $100(month 1), $100(month 2)and $150(month 3) However, it is expected that some existing customers will also seek cred it in order to obtain the discount offered. This is likely to affect the sale of 600 units, with the buyers of the remaining 9 400 units expected to continue to pay cash. Administration costs are estimated to be $150(month 0)and $60(month 1) Jumbo's required rate of return is 1.5% per month Should Jumbo adopt the proposed credit arrangements?August 2003 QUESTION 4 Each month, Jumbo Pty Ltd sells 10 000 units at $25 per unit. The marginal cost of producing each unit is $15. At present all of Jumbo’s sales are made on a strict ‘cash only’ basis. Jumbo’s manager believes that the ‘cash only’ policy has led to many sales being lost as there have been a number of inquiries concerning the possibility of credit sales. Jumbo’s manager estimates that a credit policy of 1/30, n/60 could increase sales by 1 000 units per month, of which 500 would be paid for at the end of month 1 and 400 would be paid for at the end of month 2. Of the remaining 100 units, 70 are expected to be paid for a month late and 30 are expected to be bad debts. Administration and collection costs are estimated to be $250 (month 0), $100 (month 1), $100 (month 2) and $150 (month 3). However, it is expected that some existing customers will also seek credit in order to obtain the discount offered. This is likely to affect the sale of 600 units, with the buyers of the remaining 9 400 units expected to continue to pay cash. Administration costs are estimated to be $150 (month 0) and $60 (month 1). Jumbo’s required rate of return is 1.5% per month. Should Jumbo adopt the proposed credit arrangements?