ABC Limited has annual sales of Rs. 50 lacs. The selling price per unit is Rs. 50 per unit and the variable costs is 70% of the selling price. The required rate of return on investment is 20%, average cost per unit is Rs. 40 per unit. Annual collection expenditure is Rs. 60000 and default % is 5%. The credit terms offered by the company is 60 days. The Company is considering change in the credit policy and the expected impact is as follows: Option 1 Collection Period: 45 days Collection expenditure:75000 Default%: 3% Option 2 Collection Period: 30 days Collection expenditure: 140000 Default%: 1% Advise the company on the selection of the Options.

ABC Limited has annual sales of Rs. 50 lacs. The selling price per unit is Rs. 50 per unit and the variable costs is 70% of the selling price. The required rate of return on investment is 20%, average cost per unit is Rs. 40 per unit. Annual collection expenditure is Rs. 60000 and default % is 5%. The credit terms offered by the company is 60 days. The Company is considering change in the credit policy and the expected impact is as follows: Option 1 Collection Period: 45 days Collection expenditure:75000 Default%: 3% Option 2 Collection Period: 30 days Collection expenditure: 140000 Default%: 1% Advise the company on the selection of the Options.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 1P

See similar textbooks

Similar questions

A company currently sell goods of Tk. 6,00,000 with a terms of net 30 days. Its average collection period is 45 days. The company is planning to increase its sales by extending the credit period to 60 days on all sales that would help increasing sales by 15%. After the changes in credit policy the average collection period is expected to be 75 days. Variable cost per unit is Tk. 80 and selling price is Tk. 100 per unit. The company’s required rate of return on its investment in receivables is 20%. Should the company extend its credit period?
AKM Limited has annual credit sales of $20 million with an average collection period is three months. The company is considering factoring its’ A/R balances with a Rough Financing Limited at a 10% annual interest rate and 12% reserve requirement. Rough Financing charges factoring commission of 2.5%. Historically 97% of credit sales by AKM Limited are good sales and collectible. The credit administration department has a fixed operating cost $9000 per collection cycle, while the variable cost for collection and credit admin cost is 1.75% on credit sales. What is the annualized effective interest rate for AKM Limited?
ABC Inc. currently sells P12,000,000 per annum. Its credit period and DSO are both 30 days, and 1.5% of its sales end up as bad debts. The credit manager estimates that if the firm extends Its credit period to 40 days so that its DSC increases to 40 days, sales will increase by P3,000,000 but their bad debts losses on the incremental sales will be 2.5%. Variable costs are 60%, and the cost of carrying receivables is 10%. Tax rateis 40%. (Assume 360 days per year). Compute the incremental Investment required to finance the increase in receivables if the change is implemented. What would be the Incremental cost of carrying receivables?
A manufacturer currently prices its product at 10 TL per unit. Last year, the manufacturer sold 60.000 units. The variable cost per unit is 6 TL. Total fixed costs are 120.000 TL. The manufacturer intends to increase sales by 5%. Current accounts receivable collection period is 30 days. If the manufacturer wants to relax its credit standards, the expectation is that bad debt expenses will increase from 1% of sales to 2% of sales. The opportunity cost of investing in accounts receivables is 15%. In order to benefit from relaxing its credit standards, what would be the expected maximum accounts receivable collection period? (Assume that existing customers are not expected to alter their payment habits. 1 year = 365 days) a) 82,38 days b) 63,33 days c) 105,82 days d) 63,73 dayse) other
Brevard Inc is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $2,250,000 and the average collection period (DSO) is 75 days. Brevard Inc. estimates that tightening the credit terms would reduce annaul sales to $2,025,000 but accounts recievable would drop to 39 days of sales. Brevard's variable cost ratio is 59% and its average cost of funds is 11.2%. Should the change in credit terms be made? Assume all operating costs are paid when inverntory is sold and that all sales are collected at the DSO.
ABC & Company is making sales of Rs.16,00,000 and it extends a credit of 90 days to it's customers. However, in order to overcome the financial difficulties, it is considering to change the credit policy. The firm has variable cost of 80% and fixed cost of Rs.1,00,000. The cost of capital is 15%. Evaluate different policies and which policy should be adopted?
ABC & Company is making sales of Rs.16,00,000 and it extends a credit of 90 days to it's customers. However, in order to overcome the financial difficulties, it is considering to change the credit policy. The firm has variable cost of 80% and fixed cost of Rs.1,00,000. The cost of capital is 15%. Evaluate different policies and which policy should be adopted? The proposed terms of credit and expected sales are given hereunder: Policy I II III Terms 75 days 60 days 45 days Sales Rs.15,00,000 Rs. 14,50,000 Rs 14,25,000
The Lux Co. has an inventory conversion period of 60 days, a receivable conversion period of 35 days, and a payable payment period of 45 days. The Lux Co.’s variable cost ratio is 65% and annual fixed costs of P600,000. The current cost of capital for National Co. is 12%.If Lux Co.’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s carrying cost on accounts receivable, using 360 days year?
Columbus Corp. has annual sales of $80, 000, 000; its average inventory is $20, 000, 000; and its average accounts receivable is $16,000,000. The firm buys all raw materials on terms of net 35 days payable deferral with $150,000 cost of the good sold per day. The firm is searching for ways to shorten the cash conversion cycle. If inventory conversion can be lowered to 80 days and average collection period can be reduced to 65 days while payable deferral is increased by 5 days, cost of the good sold, and annual sales remain constant, how much is the increase in firm's free cash flow?
Toshiba Company is considering offering a cash discount to speed up the collection of account receivable, currently the firm has an average collection period of 56 days, annual sales are 50,000 units, and the sales unit price is $40 with per unit variable cost is $30. A 2% discount estimates that 80% of its customers will take, if sales are expected to rise by 12%, and the average collection period increased to 60 days. The additional profit contribution from sales is
National Foods, Inc., makes a packet of corn flour that wholesales for Rs. 60.00. Each has variable operating costs of Rs.35.00. Fixed operating costs are Rs. 500,000 per year. The firm pays Rs. 130,000 interest and preferred dividends of Rs.70,000 per year. At this point, the firm is selling 30,000 packets per year and is taxed at a rate of 40%. a. Calculate National Foods’s operating breakeven point. b. On the basis of the firm’s current sales of 30,000 units per year and its interest and preferred dividend costs, calculate its EBIT and earnings available for common. c. Calculate the firm’s degree of operating leverage (DOL). d. Calculate the firm’s degree of financial leverage (DFL). e. Calculate the firm’s degree of total leverage (DTL). f. National Foods, Inc., has entered into a contract to produce and sell an additional 15,000 packets in the coming year. Use the DOL, DFL, and DTL to predict and calculate the changes in EBIT and earnings available for common. Check your work by a…