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

State the price determination under the market condition, State the price d...

State the price determination under the market condition The price determination under the following market condition is as follows: 1) Pure competition: in this situation

Calculate the direct materials costs, XYZ Industries manufactures electroni...

XYZ Industries manufactures electronic testing equipment. XYZ also installs the equipment at customers' sites and ensures that it functions smoothly. Additional information on the

Analysis, Analysis Various business decisions have recurrent themes: wh...

Analysis Various business decisions have recurrent themes: whether to the outsource production or to the support functions, what level of production and pricing to establish, w

Describe the algebraic method of the break even point, Algebraic method of ...

Algebraic method of the break even point The break even point can be computed by the following method: a) Units of sales volume . b) Budget total or in terms of money va

Complexities, major ways that these complexities might impact a business

major ways that these complexities might impact a business

State the steps for standard costing system, State the steps for Standard c...

State the steps for Standard costing system standard costing system involves the following steps 1) Setting-up of standards for each element of cost: standards should be s

Planning, Planning, Directing, and Controlling A clever sign hanging on...

Planning, Directing, and Controlling A clever sign hanging on the wall of a business establishment: "The Managers are paid to manage the work-- If There Were No Problems we wou

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