Receivables Management

PROBLEM NO. 1
The present sales of ABC ltd are Rs.50 lacs. The company classifies its customers under three
credit categories A,B and C. The company extends unlimited credit to category A, limited
credit to category B and no credit to category C. As a result of this credit policy the company
is foregoing sales to the extent of 5 lacs to customers in category B and Rs. 10 lacs to
customers in category C.
The company is considering the adoption of a more liberal credit policy according to which
category B customers will be provided with unlimited credit and customers in category C will
be provided with limited credit.
Such relaxation would increase the sales by Rs. 10 lacs on which bad debt losses will be 8 %.
The contribution margin ratio (P/V) is 15%. Average collection period is 60 days. Cost of
capital = 21%.
What will be the effect of relaxation of credit policy on the gross profit of the company?

PROBLEM NO. 2
ABC ltd provides 45 days credit to its customers. Present level of sales is Rs. 1.50 crores.
Cost of capital = 15%. Variable cost to sales = 0.80.
Company is considering extending its credit period to 60 days.
Such an extension would increase the sales by 15 lacs. The bad debts proportional to sales
would be 5%.
Calculate the increase in gross profit after the change.

PROBLEM NO. 3
The present credit terms of Taj Company are 1/10, net 30. Its sales are Rs.1.2 crores, its
average collection period is 24 days, its variable cost to sales ratio is 0.80, and its cost of
funds is 15 per cent. The proportion of sales on which customers currently take discount is
0.3. Taj Company is considering relaxing its discount terms to 2/10 net 30. Such relaxation is
expected to increase the sales by Rs. 12 lakhs reduce the average collection period to 16 days,
and increase the proportion of discount sales to 0.7. What will be the effect of relaxing the
discount policy on gross profit ?

PROBLEM NO. 4
Anil Ventures is considering relaxing its collection efforts. Presently its sales are Rs.50 lakhs,
its average collection period 25 days, its variable costs to sales ratio 0.75, its cost of capital
15 per cent, and its bad debts ratio 0.04. The relaxation in collection efforts is expected to
push sales up by Rs.6 lakhs, increase the average collection period to 40 days, and raise the
bad debts ratio to 0.06.

What will be the effect of relaxing the collection effort on the gross profit of the firm ?