FOLLOWING ARE THE DETAILS OF THE FIRM DURING PERIOD OF 12 MONTHS:
sales:1200000
selling price per unit;:10
variable cost per unit: :7
total cost per unit :9
credit period allowed to customers : one month
the firm is considering a proposal for libral extension of credit by increasing the avg collection period from one month to two month
this relaxation is expected to increase the sales by 25%
Total Cost per unit = 9
Variable Cost per unit = 7
Therefore Fixed Cost per unit = 9 - 7 = 2
Therefore Total Fixed Cost = 2 x 120000 = 240000 [120000 is the total units sold]
Statement showing Analysis
………………………………………………Current Proposed
Units sold 120000 150000
Sales (units x 10) 1200000 1500000
(-) Variable Cost (units x 7) 840000 1050000
Contribution 360000 450000
(-) Fixed Cost (as calculated above) 240000 240000
Operating Profit 120000 210000
(-) Required Return 22500 53750
Surplus 97500 156250
Surplus is more if credit is extended. Therefore credit should be extended.
Note: Required return is calculated on Total Cost approach, i.e. FC + VC x Rate% x Credit period
In the Current policy, Required return = 240000 + 840000 x 25% x 1/12 = 22500
In the Proposed policy, Required return = 240000 + 1050000 x 25% x 2/12 = 53750
is it ok/??
CAclubindia
