Credit standards, Managerial Accounting

Assignment Help:

This variable deals along with the granting of credit. On one great all the customers are granted credit and conversely, none of them are granted credit irrespective of their credit rating, but in nowadays competitive environment it is impossible. Usually liberal credit standards initiate increased sales accompanied through higher incidence of bad debts, tying of funds in accounts receivable and raised cost of credit collection. Tight or stiff credit standards lead to reduced sales, lower incidence of bad debts, reduced investment in accounts receivable and reduced collection cost.

The quantitative consequence of relaxing the credit standards on profit can be estimated through the equation 1:

? NP = [? S (1 - V ) - ? S bn ](1 - t) - k?I          ............(1)

Here

? NP =          Change in net profit

? S  =          Increase in sales

V     =          Ratio of variable cost to sales

bn    =          Bad debt ratio on new sales

T     =          Tax rate

K     =          Cost of capital

? I   =          raise in receivable investment

 ? I  = (? S/360) . ACP . V

(? S/360) = Average daily change (increase in sales)

 ACP = Average collection period

Here let us see how each element of equation 1 affects net profit. ? S (1-V) shows the raise in gross incremental profit, because of relaxed credit standard and for this reason gross profit, is explained as Sales-Variable cost. ? Sbn computes the bad debts upon incremental sales. The first part of the equation [ ? S (1-V) - ? Sbn] (1-t) shows the post tax operating profit arising from of incremental sales and k ? I measures the post tax opportunity cost of capital locked in extra investment on account of relaxed credit standards. The pre-tax operating profit is multiplied via (1-t) so as to get past tax operating profit.


Related Discussions:- Credit standards

Budget Problem, BUDGET PROBLEM The Budget Director of Dave, Inc. with the ...

BUDGET PROBLEM The Budget Director of Dave, Inc. with the assistance of the Controller, Production Manager and the Sales Manager has gathered the following data for use in develop

Illustrate traditional budgeting vs zero base budgeting, Traditional budget...

Traditional budgeting vs. zero base budgeting 1) Traditional budgeting is accounting oriented. Main stress happens to be on previous level of expenditure. Zero base budgeting m

Choosing order quantity , CHOOSING ORDER QUANTITY (SIZE—PROBLEM) The ob...

CHOOSING ORDER QUANTITY (SIZE—PROBLEM) The objective of inventory decisions is usually to minimize total inventory costs to the company. Costs are ascribed to all elements whic

Decision - making, Decision Making Some managers appear to have an...

Decision Making Some managers appear to have an intuitive sense of good decision making. The reality is that good decision making is hardly ever done by intuition. Consist

Prepare a fixed budget and a flexible budget, Question: A company has b...

Question: A company has budgeted to produce and sell 10,000 units of a product, the selling price and the variable cost per unit of which is Rs 20 and Rs 12 respectively. Fixe

Accounting, what is Computerized Processing Systems

what is Computerized Processing Systems

Batch size of one-jit features, Batch size of one Set up time is the am...

Batch size of one Set up time is the amount of time needed to adjust tools and to retool for various product. Long set ups a change over time make the production of batches wit

Support each classification with appropriate rationale., For this assignmen...

For this assignment, please complete and submit Task 1 and Task 2 as described below. Task 1: Classifying Cash Flows The following are transactions, events, and changes in balances

The games economists play, THE GAMES ECONOMISTS PLAY It sounds like a s...

THE GAMES ECONOMISTS PLAY It sounds like a sports fan's dream.  In Stockholm on October 11th, three men share a $1m prize for their skill at analyzing games. They are not telev

Costs, Recommend whether marginal or absorption costing should be use for i...

Recommend whether marginal or absorption costing should be use for internal monthly reporting

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd