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Illustration 1: A company has prepared the following projections for a year

Sales 21000 units


Selling Price per unit Rs.40
Variable Costs per unit Rs.25
Total Costs per unit Rs.35
Credit period allowed One month

The company proposes to increase the credit period allowed to its customers from one month
to two months .It is envisaged that the change in 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?

Solution:

Particulars Present Proposed Incremental


Sales (units) 21000 22680 1680
Contribution per unit Rs.15 Rs.15 Rs.15
Total Contribution Rs.3,15,000 Rs.3,40,000 Rs.25,200
Variable cost @ Rs.25 5,25,000 5,67,000 42,000
Fixed Cost 2,10,000 2,10,000 ------
42,000
Total Cost 7,35,000 7,77,000 -----

Credit period 1 month 2 month

Average debtors at cost Rs.61250 Rs.1,29,500 Rs.68,250

Incremental Return = Increased Contribution/Extra Funds


Blockage *100
= Rs.25,200/Rs.68,250*100
=36.92%
Illustration 2: ABC & Company is making sales of Rs.16,00,000 and it extends a
credit of 90 days to its customers. However, in order to overcome the financial
difficulties, it is considering to change the credit policy. The proposed terms of credit
and expected sales are given hereunder:

Policy Terms Sales


I 75 days Rs.15,00,000
II 60 days Rs. 14,50,000
III 45 days Rs 14,25,000
IV 30 days Rs 13,50,000
V 15 days
Rs.13,00,000

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?

Solution:
figures in Rs.
Particular
Present I II III IV V
s
Sales 1,600,000 1,500,000 1,450,000 1,425,000 1,350,000 1,300,000
Variable cost 1,280,000 1,200,000 1,160,000 1,140,000 1,080,000 1,040,000
Fixed Cost 100,000 100,000 100,000 100,000 100,000 100,000
Profit (A) 220,000 200,000 190,000 185,000 170,000 160,000

Total Cost 1,380,000 1,300,000 1,260,000 1,240,000 1,180,000 1,140,000

Average 345,000 270,833 210,000 155,000 98,333 47,500


Receivable
(Cost360x
credit period

Cost of 51,750 40,625 31,500 23,250 14,750 7,125


debtors @
15% (B)

Net profit (A 168,250 159,350 158,500 161,750 155,250 152,875


B)
Illustration3: A trader whose current sales are Rs.1,500,000 per annum and average collection period is 30 days
wants to pursue a more liberal credit policy to improve sales. A study made by consultant firm reveals the following
information.

Credit Policy increase in collection period Increase in sales


A 15 days Rs.60,000
B 30 days 90,000
C 45 days 150,000
D 60 days 180,000
E 90 days 200,000

The selling price per unit is Rs.5. Average Cost per unit is Rs.4 and variable cost per unit I Rs.2.75 paise per unit. The
required rate of return on additional investments is 20 percent (cost of capital). Assume 360 days a year and also
assume that there are no bad debts. Which of the above policies would you recommend for adoption.

Solution:

Particulars Present A B C D E
Credit period 30 days 45 days 60 days 75 days 90 days 120 days

No. of units @ Rs.5 300,000 312,000 318,000 330,000 336,000 340,000


Sales 1,500,000 1,560,000 1,590,000 1,650,000 1,680,000 1,700,000
Variable 8,25,000 8,58,000 874,500 907,500 924,000 935,000
cost@ 2.75

Fixed Cost 375,000 375,000 375,000 375,000 375,000 375,000


Total Cost 1,200,000 1,233,000 1,249,500 1,282,500 1,299,000 1,310,000
Profit (A) 300,000 327,000 340,500 367,500 381,000 390,000
Average
debtors 100,000 154,125 208,250 267,188 324,750 436,667
cost(at cost)
[(TC )(x/360)]

Cost of
investment@ 20,000 30,825 41,650 53,437 64,950 87,333
20% (B)

Net Profit (A- 280,000 296,175 298,850 314,063 316,050 302,667


B)

Lets Sum Up
The receivables emerge when goods are sold on credit and the payments are deferred by the customers. So, every firm
should have a well-defined credit policy.
The receivables management refers to managing the receivables in the light of costs and benefit associated with a
particular credit policy.
Receivables management involves the careful consideration of the following aspects: Forming of credit policy, Executing the
credit policy, Formulating and executing collection policy.
The credit policy deals with the setting of credit standards and credit terms relating to discount and credit period.
The credit evaluation includes the steps required for collection and analysis of information regarding the credit worthiness
of the customer.