T.Y.A/F Credit Management – Problem compiled by Dr.

Abida Khan

UNIT 5 - CREDIT MANAGEMENT

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Problem 1:
A company has prepared the following projections for a year.
Sales 21000 units
Selling price per unit Rs. 40
Variable cost per unit Rs. 25
Total cost per unit Rs. 35
Credit period allowed 1 month
The company proposes to increase the credit period allowed to its customers from one month to
two month. 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.

Problem 2:
In order to increase sales from its present level of Rs. 2.4 lakhs p.a. Your marketing manager
submits proposal for liberalizing the credit policy as shown below:
Present sales - Rs. 2,40,000
Credit period - 30 days
Proposed increase in credit beyond 30days – Increase in sales over Rs. 2,40,000
15 days – Rs. 12,000
30 days – Rs. 18,000
45 days – Rs. 21,000
60 days – Rs. 24,000
The P/V ratio of the company is 33 1/3%. The company expects a pre-tax return on investment
of 20%. Evaluate the above alternatives and advise the management (assume a 360 days a year).

Problem 3:
Super Manufacturers Ltd. sells their product in cash. Now they desire to sell their products on
credit in order to increase the volume of sales. It wants to grant credit to its customers in the
following two alternatives forms from which you are asked to find out the better one.
1 month credit policy 2 month credit policy
Increase in the volume of sales by 50% 75%
Increase in fixed expenses Rs. 4,000 8,000
Cost of collection Rs. 10,000 15,000
Bad debts - 1% on sales
Opportunity cost of capital 10% 10%
Present level of activity:
Sales Rs. 4,00,000
Stock Rs. 80,000
Profit 25% on sales

Problem 4:
Company X furnished the following particulars:
Credit sales – Rs. 50,00,000
Variable cost to sales ratio – 50%
 T.Y.A/F Credit Management – Problem compiled by Dr. Abida Khan

Fixed cost – Rs. 11,00,000

Present credit policy is 2 months.
Cash discount scheme of ‘2/10, net 60’ is to be introduced.
It is estimated that 50% of the debtors will enjoy the discount scheme. As a result, the average
age of debtors would be reduced to 1 month. Required rate of return on investment in debtors
may be taken at 20% before tax. Evaluate the proposal.

Problem 5:
Reliance Ltd. manufactures readymade garments and sells them on credit bases through a
network of dealers. Its present sale is Rs. 60 lakhs p.a.with 20 days credit period. The company is
contemplating an increase in the period of credit with a view to increasing sales. Present variable
costs are 70% of sales and the total fixed costs Rs. 8 lakhs p.a. The company expects pre-tax
return on investment @ 25%. Some other details are given as under:
Proposed Credit Policy Average Collection Period (days) Expected Annual Sales (Rs. lakh)
I 30 65
II 40 70
III 50 74
IV 60 75
Required: Which credit policy should the company adopt? Present your solution in a tabular
form. Assume 360 days in a year. Calculations should be made up to two digits after decimals

Problem 6:
Himalaya Ltd. has a present annual sales level of 10,000 units at Rs. 300 per unit. The variable
cost is Rs. 200 per unit and the fixed costs amount to Rs. 3,00,000 p.a. The present credit period
allowed by the company is 1 month. The company is considering a proposal to increase the
credit period to 2 months and 3 months and has made the following estimates.
Particulars Existing Proposed
Credit policy 1 month 2 months 3 months
Increase in sales - 15% 30%
% of bad debts 1% 3% 5%
There will be increase in fixed cost by Rs. 50,000 on account of increase of sales beyond 25% of
present level. The company plans on a pre-tax return of 20% on investment in receivables (based
on total cost). You are required to calculate the most profitable credit policy for the company.

Problem 7:
Honda Ltd. is considering relaxing its present credit policy and is in the process of evaluating
two proposed policies. Currently, the company has annual credit sales of Rs. 60 lakhs and
accounts receivable turnover ratio of 5 times a year. The current level of loss due to bad debts is
Rs. 2,00,000. The company is required to give a return of is 25% on the investment in new
accounts receivables. The company’s variables cost are 60% of the selling price. Given the
following information, which is policy option should be adopted?
Particulars Present policy Policy I Policy II
Annual credit sales Rs. 60,00,000 65,00,000 70,00,000
Accounts receivable 5 times 3 times 2 times
turnover ratio
Bad debts losses Rs. 1,00,000 1,20,000 1,50,000
 T.Y.A/F Credit Management – Problem compiled by Dr. Abida Khan

Problem 8: TYBAF, OCT 2016

Jack Ltd has at present annual turnover of Rs. 39,00,000 and the company grants one month
credit to its customers. Company’s selling price is Rs. 10 per unit. Bad debt loss is 1% of sales
and contribution is Rs. 3 per unit. Company’s new marketing manager has given three different
proposals to make credit policy more liberal to increase company’s sales and profit. These
proposals are as follows:
Proposal I: To grant one and half month’s credit to customers which will increase sales to Rs. 44
lakhs with anticipated increase in bad debt loss of 1% of sales.
Proposal II: To grant two months credit to customers this will increase sales to Rs. 45 lakhs with
anticipated bad debt loss of 3% of sales.
Proposal III: To grant three months credit to customers which will increase sale to Rs. 50 lakhs
with anticipated increase in bad debt loss of 4% of sales.
Company expects a return of 20% on the additional investment in account receivables. Which of
the above proposal would you recommend to the company to accept?

Problem 9: TYBAF, OCT 2015

Sunshine Ltd has a present annual sales level of 10,000 units at Rs. 300 per unit. The variable
cost is 662/3% of sales while administration overheads amount to Rs. 2,50,000 p.a. and
depreciation Rs. 50,000b p.a. The present credit period allowed is 1 month. The company wishes
to consider the proposal of liberal credit policy and has the following estimates:
Particulars Existing Proposal A Proposal B
Credit period 1 month 2 months 3 months
Increase in sales - 15% 30%
% of bad debts 1 3 5
As the sales exceeds beyond 25% of current sales, the administrative overheads increase by Rs.
50,000. The expected rate of return on investment before tax is 20% p.a. You are asked to advise
the company which policy shall be best suited.

Problem 10:
Seashell Ltd. has classified its customers into five risks categories as follows:
Category % of bad debts Average Collection period
A 2 30 days
B 3 45 days
C 4 60 days
D 15 100 days
E 20 150 days
At present the company allows unlimited credit to customers in categories A, B and C, limited
credit to customers in category D, and no credit to customers in category E. Due to this policy,
the customer rejects orders of Rs. 4,00,000 from customers in category D and Rs. 6,00,000 from
customers in category E. The variable cost to sales ratio for Seashell Ltd. is 70% and the
opportunity cost of funds is 20% Should company grant credit to all customers in categories D &
E as well? Assume 360 days in a year.

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