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1 A firm has credit sales amounting to Rs. 32,00,000. The sales price per unit is Rs. 40, the
variable cost is Rs. 25 per unit while the average cost per unit is Rs. 32. The average age
of accounts receivable of the firm is 72 days. The firm is considering to tighten the credit
standards. It will result in a fall in the sales volume to Rs. 28,00,000 and the average
cost age of accounts receivable to 45 days. Assume 20% rate of return. Is the proposal
under consideration feasible?
2 Hypothetical Ltd is examining the question of relaxing its credit policy. It sells at present
20,000 units at a price of Rs. 100 per unit, the variable cost per unit is Rs. 88 and average
cost per unit at current sales volume is Rs. 92. All the sales are on credit, the average
collection period is being 36 days.
A relaxed credit policy is expected to increase sales by 10% and the average age of
receivables to 60 days. Assuming 15% return, should the firm relax its credit policy?
3 ABC & Company is making sales of Rs. 16,00,000 and it extends a credit of 90 days to
its customers. However, in order to overcome the financial difficulties, it is considering
to change the credit policy. The proposed terms of credit and expected sales are given
Policy Terms Sales
I 75 days Rs. 15,00,000
II 60 days Rs. 14,50,000
III 45 days Rs. 14,25,000
IV 30 days Rs. 13,50,000
V 15 days Rs. 13,00,000
The firm has a variable cost of 80% and a fixed cost of Rs. 1,00,000. The cost of capital
is 15%. Evaluate different proposed policies and which policy should be adopted? (Year
may be taken as 360 days).
4 A trade whose current sales are in the region of Rs. 6 lakhs per annum and an average
collection period of 30 days wants to pursue a more liberal policy to improve sales. A
study made by a management consultant reveals the following information:
Credit Policy Increase in Increase in Sales Present Default
Collection Period Anticipated
A 10 days Rs. 30,000 1.5%
B 20 days Rs. 48,000 2%
C 30 days Rs. 75,000 3%
D 45 days Rs. 90,000 4%
The selling price per unit is Rs. 3. Average cost per unit is Rs. 2.25 and variable costs
per unit are Rs. 2. The current bad debt loss is 1%. Required return on additional
investment is 20%. Assume a 360 days in a year. Which of the above would you
recommend for adoption?
5 The present credit terms of Multimedia company are 2/15, net 45. Its sales are Rs. 200
million, its average collection period, ACP is 30 days, its variable costs to sales ratio, V,
is 0.80 and its cost of capital, k, is 12 per cent. The proportion of sales on which
customers currently take discount, P0, is 0.5. the company is considering relaxing tis
discount terms to 3/15 net 45. Such a relaxation is expected to increase sales by Rs.10
million, reduce the ACP to 27 days, and increase the proportion of discount sales to 0.6.
Multimedia’s tax rate is 40 per cent.
What will be the effect of liberalising the cash discount on residual income?