Answer Happy

ASSIGNMENT THREE DUE DATE 15/06/2022. (a) Kaluba, Ltd achieves current annual sales of K1,800.000 The cost of sales is 80% of this amount but bad debts average 1% of total sales, and the annual profit is as follows: K Sales 1,800,000 Less: cost of sales (1.440,000) Gross profit 360,000 Less: bad debts (18,000) Net profit 342,000 The current debt collection period is one month, and the management consider that if credit terms were eased (option A below) then the effects would be as follows: Present Policy Option A Additional Sales 25% Average collection Period 1 month 2 months Bad debts (% of sales) 1% 3% The company requires a 20% return on its investments. If the cost of sales are 75% variable and 25% fixed and on the assumption that: ▪ there would be no increase in fixed costs from the additional turnover there would be no increase in average stocks or creditors Required: What is the preferable policy, Option A or the present one? (b)What is meant by the cash conversion cycle? (20 Marks) (5 Marks) [Total 25 Marks]