Urgent for CS exams-FM

The present credit terms of Creation Ltd. are 1/10 net 30. Its annual sales80 Lakhs, its average collection period is 20 days, its variable costs and average total costs to sales are0.85 and .95 respectively and its cost of capital is 10%. The proportion of sales on which customer currently take discount is 0.5. Creation Ltd. is considering relaxing its discount terms to 2/10, net 30. Such relaxation is expected to increase sales by5 Lakhs, reduce the average collection period to 14 days and increase the proportion of discount sales to 0.8. What will be the effect of relaxing the discount policy on Company’s profit? Take an year as of 360 days.

can u give me the solution of this problem????????????????

thanks in regard

Replies (1)

A way of providing cash discounts on purchases.

1/10 net 30

It means that if the bill is paid within 10 days, there is a 1% discount. Otherwise, the total amount is due within 30

days.

For example, if  RS1000 1/10 net 30" is written on a bill, the buyer can take a 1% discount (1000 x .01 = 10) and

make a payment of 990 within 10 days, or pay the entire 1000 within 30 days.  

2/10, net 30

It means that if the bill is paid within 10 days, there is a 2% discount. Otherwise, the total amount is due within 30

days.

For example, if  RS1000 1/10 net 30" is written on a bill, the buyer can take a 1% discount (1000 x .02 = 20) and

make a payment of 980 within 10 days, or pay the entire 1000 within 30 days.

In the instant problem posted by you, evaluate the cost of extending additional cash discount vs increase in

additional sales and accordingly work out the problem

With best wishes for the exams and all of your endeavours and all the students appearing for CS exams

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