Receivables: Credit Terms: ABC sold boxes of candles at P1,000 each. Each box costs P750. Daily sales total 500 boxes over its 250-work day year. All sales are on credit. For the coming year, it plans to accept customers who have less desirable credit ratings. Sales are expected to increase by 10%. Average collection period will increase from 40 days to 50 days. Bad debts will increase from 1% to 3% of sales. Operating expenses will stay the same. For profitability analysis, ABC uses an 8% effective interest rate. Compute for the required by filling up the supporting table. Required: How much would the following be assuming that ABC proceeds with its plan to accept the new market group? 7. Increase in gross profit 8. Increase in receivables carrying cost 9. Increase in bad debts 10. Net advantage or disadvantage of the plan Notes: 1. The Increase/(Decrease) column may be computed either by row or later once the Current and Proposed columns are complete. 2. Some parts of the computations were omitted in the supporting table. These include turnovers and average balance as well as conversion of daily amounts to annual amounts. Students are assumed to know how to compute for these because they were taken up in the previous topics. 3. Be careful when computing for the net advantage or disadvantage. Increase in gross profit is favorable/advantageous but increase in expenses are not.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Receivables: Credit Terms: ABC sold boxes of candles at P1,000 each. Each box costs P750. Daily sales total 500 boxes over
its 250-work day year. All sales are on credit. For the coming year, it plans to accept customers who have less desirable
credit ratings. Sales are expected to increase by 10%. Average collection period will increase from 40 days to 50 days. Bad
debts will increase from 1% to 3% of sales. Operating expenses will stay the same. For profitability analysis, ABC uses an 8%
effective interest rate. Compute for the required by filling up the supporting table.
Required: How much would the following be assuming that ABC proceeds with its plan to accept the new market group?
7. Increase in gross profit
8. Increase in receivables carrying cost
9. Increase in bad debts
10. Net advantage or disadvantage of the plan
Notes:
1. The Increase/(Decrease) column may be computed either by row or later once the Current and Proposed
columns are complete.
2. Some parts of the computations were omitted in the supporting table. These include turnovers and average
balance as well as conversion of daily amounts to annual amounts. Students are assumed to know how to
compute for these because they were taken up in the previous topics.
3. Be careful when computing for the net advantage or disadvantage. Increase in gross profit is
favorable/advantageous but increase in expenses are not.
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