Plz help me out with this problem in Financial management

IPCC 1471 views 8 replies

ketan

article

44 Points Joined May 2010

X Ltd maufactures readymade garments and sells them on credit basis through a network of dealers Its present sale is 60 lakhs per annum with 20 days credit period. The company is contemplating an increase in the credit period with a view to increase sales. Present variable costs are 70% of sales and the total fixed costs 8 lakhs per annum.The company expects pretax return on investment @ 25%.Some other details are given below:

Proposed credit policy Average collection period Expected annual sales (in lakhs)

1 30 days 65

2 40 days 70

3 50 days 74

4 60 days 75

Required: Which credit policy should the company adopt? Assume 360 days in a year

I have got two solutions can anyone tell me which one is correct

I have attached the solution in the excel file

Attached File : 22 book1.xls downloaded: 146 times

Replies (8)

NUKUL GARG

Senior Associate Consultant

1231 Points Joined June 2010

Go for First Solution, as per my solution also it is 3rd policy to be selected.

santhoshi

article assistant

179 Points Joined November 2009

Go for First Solution, as per my solution also it is 3rd policy to be selected

Santhosh Poojary

SIEMPRE AHÍ PARA TI

15607 Points Joined December 2008

Originally posted by : santhoshi
	Go for First Solution, as per my solution also it is 3rd policy to be selected

Agreed

CA Manish Kumar

Chartered Accountant

383 Points Joined October 2010

The first solution is correct because the question belongs to the loosening the credit period and incremental contribution should be ( Expected contribution - Existing Contribution).Therefore as per the concept the first alternative is better.

Minnal

Apprentice

98 Points Joined October 2009

I too go with first solution. I have another doubt in this very sum. Regarding debtors i used to take the cost of sales as debtors, (Which i have followed from padhuka) and you had solved using sales as debtors. Which is correct to be followed. I have enclosed file to show u how i solved the padhuka problems.

CA Manish Kumar

Chartered Accountant

383 Points Joined October 2010

Normally cost of sales is taken becaues we have invested only cost of sales and the opportunity cost is only calculated on the basis of Cost of sales but some authers also prefer to calculate opportunity cost by taking the total sales.But whstever you do in question paper it is advisable to write a note below the question.

ketan

article

44 Points Joined May 2010

thank you all for the replies... minnal and manish i have taken cost of sale too ... as u can see in the solution the investment in debtors @ 70% represents the cost of sale............ but i want to know under what circumstances the second solution will be used...

ravi

unemployed

185 Points Joined February 2010

wats the definition of incremental.."incremental means,wat wud happen if new policy is followed in comparision to existing policy.."here the co is already followin 20 day cr period.so,all contri shud be compared with exisin policy.....so,sol 1 is correct...