ACCOUNTING FOR MANAGERIAL DECISIONS

RECEIVABLE MANAGEMENT
KRUTIKA MANE
SYBMS MARKETING
ROLL NO. 112
Question 1: A company has proposed to increase the credit allowed
to its customers from 1 month to 2 months. It is predicted that the
change will increase the sales by 8%. They desire a return of 25% on
its investment. You are required to examine and advise whether the
proposed credit policy should be implemented or not?
Sales 21000 units
Selling Price per unit Rs.40
Variable Costs per unit Rs.25
Total Costs per unit Rs.35
Credit period allowed 1 month
Particulars Present policy Proposed policy
Units 21000 22680
Price per unit 40 40
Sales 840000 907200
Total contribution 315000 340000
Variable cost @ Rs 25 525000 567000
Fixed cost 210000 210000
Total cost 735000 777000
Credit period 1 month 2 months
Average debtors @cost Rs 61250 Rs 129500
Cost @25% 15313 32375
Net benefit 89687 97825
Policy benefit ---- 8138
The proposed credit policy could be implemented which has net
benefit of Rs. 8,138 over existing policy.
Question 2: A company had to decide on a proposal of liberal
extensional credit with an increase of collection period from 1 month
to 2 months. The product was sold for Rs.20 per unit with variable
cost of Rs.15 giving current actual sales of 24 lakhs. The average total
cost per unit was Rs.18. The new credit policy was expected to
increase sales by 25% i.e. 30 lakhs annually. The management aimed
for return of 25% on additional investment. You are required to make
relevant calculations to examine the implications of liberalizing of the
credit policy.
Solution:
Particulars Present Proposed
policy policy
1. Units 120000 150000
2. Price per unit 20 20
3. Sales 2400000 3000000
4. Total contribution 600000 750000
5. Variable cost @Rs15 1800000 2250000
6. Fixed cost 360000 360000
7. Profit 240000 390000
8. Total cost 2160000 2610000
9. Credit period 1 month 2 months
10 Average debtors @cost 180000 435000
. Cost @25% 45000 108750
11 Net benefit 195000 281250
. Policy benefit ---- 86250
A.
B.

Working notes: units = sales/price per unit = sales/price per unit

= 2400000/20 = 3000000/20
= 120000 = 150000
Question 3: A company is considering a change in its credit policy. It
is required to give a return of 20% on the investments in new accounts
receivables, the variable costs are 70% of the selling price. Return on
investment in new accounts receivable is based on cost of investment
in debtors. Which option would you recommend?
Particulars Present policy Policy 1 Policy 2
Annual sales 3000000 4200000 4500000
Debtors turnover ratio 4 times 3 times 2.4 times
Loss due to bad debts 3% of sales 5% of sales 6% of sales

Solution: credit period = 360 days / debtor turnover ratio.

Particulars Present Policy Policy

policy option 1 option 2
1. Sales 3000000 4200000 4500000
2. Variable cost @70% 2100000 2940000 3150000
3. Contribution 900000 1260000 1350000
4. Bad debts % of sales 3.0% 5.0% 6.0%
5. Bad debts 90000 210000 270000
6. Profit 810000 1050000 1080000
7. Total cost 2100000 2940000 3150000
8. Days per year 360 360 360
9. Credit period days 90 120 150
10 Average debtors 525000 980000 1312500
. Cost % 20% 20% 20%
11 Cost (Rs.) 105000 196000 262500
. Net benefit 705000 854000 817500
12 Policy benefits ---- 149000 112500
.
A.
B.
The company is advised to adopt policy option 1 as it gives the
maximum profit to the company.
Question 4: A company is planning to relax its credit policy to
motivate customers. The variable cost will remain 75 % of sales. The
incremental sales are expected to be sold on credit. The company
requires higher return by liberalizing the credit terms. Which credit
policy should the company pursue?
Credit policy Required return Collection period New sales (Rs.)
A 20% 40 300000
B 25% 45 400000
C 32% 55 500000
D 40% 70 600000

Solution:
Particulars Policy A Policy B Policy C Policy D

1. Sales 300000 400000 500000 600000

2. Variable cost 225000 300000 375000 450000
@75%
3. Contribution 75000 100000 125000 150000
4. Total cost 225000 300000 375000 450000
5. Days per year 360 360 360 360
6. Credit period days 40 45 55 70
7. Average debtors 25000 37500 57292 87500
8. Cost (%) 20% 25% 32% 40%
9. Cost (Rs.) 5000 9375 18333 35000
A. Net benefit 70000 90625 106667 115000

The company should pursue policy D as it gives maximum profits to

the company.
Question 5: A company sells on credit basis, its present sale is 60
lakhs annually with 20 days credit period. The company is looking for
an increase in the credit period with the view to increasing sales.
Present variable costs are 70% of sales and total fixed costs 8 lakh
annually. It expects return on investment at 25%. Which credit policy
should the company adopt? (assume 360 days a year)
Proposed policy Average collection Expected annual
period (days) sales (lakhs)
1 40 70
2 50 74

Solution:
Particulars Present Policy 1 Policy 2
1. Sales 6000000 7000000 7400000
2. Variable cost @70% 4200000 4900000 5180000
3. Contribution 1800000 2100000 2220000
4. Fixed cost 800000 800000 800000
5. Profit 1000000 1300000 1420000
6. Total cost 5000000 5700000 5980000
7. Days per year 360 360 360
8. Credit period (days) 20 40 50
9. Average debtors 277778 633333 830556
10 Costs (%) 25% 25% 25%
. Costs (Rs.) 69444 158333 207639
11 Net benefit 930556 1141667 1212361
. Policy benefits ---- 211111 281805
A.
B.

The company should adopt the credit policy 2 with collection period
of 50 days as it gives maximum profit to the company.