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Additional Problems On Credit Policy

The document contains two problems related to evaluating proposed changes to credit policies. The first problem examines increasing the credit period from 1 month to 2 months, which would increase sales by 8%. Calculations show the incremental returns of 36.92% which is above the desired 25% return, so the proposal should be accepted. The second problem looks at increasing the credit period from 60 to 72 days, which would increase sales from Rs. 8,00,000 to Rs. 10,00,000. Calculations show the incremental debtors cost at 15% would be Rs. 5,600 but the incremental profit is Rs. 1,04,000, giving a net profit of Rs. 98,400, so

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Jayant Rane
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779 views2 pages

Additional Problems On Credit Policy

The document contains two problems related to evaluating proposed changes to credit policies. The first problem examines increasing the credit period from 1 month to 2 months, which would increase sales by 8%. Calculations show the incremental returns of 36.92% which is above the desired 25% return, so the proposal should be accepted. The second problem looks at increasing the credit period from 60 to 72 days, which would increase sales from Rs. 8,00,000 to Rs. 10,00,000. Calculations show the incremental debtors cost at 15% would be Rs. 5,600 but the incremental profit is Rs. 1,04,000, giving a net profit of Rs. 98,400, so

Uploaded by

Jayant Rane
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Additional Problems on Credit Policy

1) A company has prepared the following projections for a year:


Sales 21000 units
Selling Price per unit ₹40
Variable Cost per unit ₹25
Total Cost per unit ₹35
Credit period allowed 1 Month
The company proposes to increase the credit period allowed to its customers from one month to two
months. It is envisaged that the change in the policy as above will increase the sales by 8%. The company
desires a return of 25% on its investment. You are required to examine and advise whether the proposed
Credit Policy should be implemented or not.
Solution:
Evaluation of Credit Policy

Particulars Present Proposed Incremental


Sales (units) 21000 22680 1680
Contribution per unit ₹ 15 ₹ 15 ₹ 15
Total Contribution ₹ 3,15,000 ₹ 3,40,200 ₹ 25,200
Variable Cost per unit ₹ 25 ₹ 25 ₹ 25
Total Variable Cost ₹ 5,25,000 ₹ 5,67,000 ₹ 42,000
Fixed Cost ₹ 2,10,000 ₹ 2,10,000 -
Total Cost ₹ 7,35,000 ₹ 7,77,000 ₹ 42,000
Credit Period 1 Month 2 Month -
Average Debtors at Cost ₹ 61,250 ₹ 1,29,500 ₹ 68,250

𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑖𝑖𝑖𝑖 25200


Incremental Return = *100 = * 100 = 36.92%
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑖𝑖𝑖𝑖 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 68250

Conclusion: The additional returns due to change in credit policy comes to 36.92%, which is more than
the desired return of 25%. Hence, the proposal of increasing the credit period from one month to two
months may be accepted.

2) ABC Ltd. has currently an annual credit sale of ₹8,00,000. Its average age of accounts receivables is 60
days. It is contemplating a change in its credit policy that is expected to increase sales to ₹10,00,000 and
increase the average age of accounts receivables to 72 days. The firm’s sales price is ₹25 per unit, the
variable cost per unit is ₹12 and the average cost per unit at ₹8,00,000 sales volume is ₹17. Assume a
360-day year, and calculate the following:
a) What is the average accounts receivable with both the present and the proposed plans?
b) What is the cost of marginal investment, if the assumed rate of return is 15%?
Solution:
Total Sales = ₹8,00,000
Selling Price p. u. – ₹25
No. of units sold – 32,000
Fixed Cost (₹17 – ₹12) = ₹5 per unit
Total Fixed Cost (32000 units * ₹5 per unit) = ₹160000
Evaluation of Credit Policy

Particulars Present Proposed


Sales (units) 32,000 40,000
Variable Cost @ ₹12 ₹ 3,84,000 ₹ 4,80,000
Fixed Cost ₹ 1,60,000 ₹ 1,60,000
Total Cost ₹ 5,44,000 ₹ 6,40,000
₹
Total Sales ₹ 8,00,000
10,00,000
Profit ₹ 2,56,000 ₹ 3,60,000
Credit Period 60 days 72 days
Average Debtors in Selling Price
(32000/360*60 = 5333 * ₹25) ₹ 1,33,333 ₹ 2,00,000
(40000/360*72 = 8000 * ₹25)
Average Debtors at Cost
(₹5,44,000/360*60) ₹ 90,667 ₹ 1,28,000
(₹6,40,000/360*72)
Incremental Debtors at Cost
₹ 37,333
(₹1,28,000 - ₹90,667)
Cost of Incremental Debtors @ 15% ₹ 5,600
Incremental Profit
₹ 1,04,000
(₹3,60,000 - ₹2,56,000)
Net Profit
₹ 98,400
(₹1,04,000 - ₹5,600)
Conclusion: The new credit policy may be adopted as it is expected to give net benefit of ₹98,400.

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