A trader whose current sales are Rs.15 lakhs per annum and average collection period is 30 days wants to pursue a more liberal credit policy to improve sales. A study made by consultant firm reveals the following information. Credit Policy increase in collection period by Increase in sales by 15 days Rs 60,000 30 days Rs 90,000 The selling price per unit is Rs.5. Average Cost per unit is Rs.4 and variable cost per unit Rs.2.75 per unit. The required rate of return on additional investments is 20 percent. Assume 360 days a year and also assume that there are no bad debts. Which of the above policies would recommend for adoption ? you

A trader whose current sales are Rs.15 lakhs per annum and average collection period is 30 days wants to pursue a more liberal credit policy to improve sales. A study made by consultant firm reveals the following information. Credit Policy increase in collection period by Increase in sales by 15 days Rs 60,000 30 days Rs 90,000 The selling price per unit is Rs.5. Average Cost per unit is Rs.4 and variable cost per unit Rs.2.75 per unit. The required rate of return on additional investments is 20 percent. Assume 360 days a year and also assume that there are no bad debts. Which of the above policies would recommend for adoption ? you

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

A dader whose current sales are Rs. 15 lakhs per annum and average collection period is 30 days wants to
pursue a more liberal credit policy to improve sales. A study made by consultant firm reveals the following
information.
Credit Policy
increase in collection period by
Increase in sales by
15 days
Rs 60,000
30 days
Rs 90,000
The selling price per unit is Rs.5. Average Cost per unit is Rs.4 and variable cost per unit Rs.2.75 per unit.
The required rate of return on additional investments is 20 percent.
Assume 360 days a year and also assume that there are no bad debts. Which of the above policies would you
recommend for adoption ?
B.

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Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 2 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are currently $1,000,000, variable cost is $600,000 (note the variable cost % is 60%). The firm expects that the change in credit terms will result in an increase in sales to $1,500,000 per year and variable costs will increase to $900,000 per year. Fizzy projects that 80 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's required return on equal-risk investments is 10 percent. (Assume a 360-day year.) What is the cost (benefit) of the marginal cash discount? O ($18,000) O $24,000 ($22,000) O $30,000
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