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

Status resources, Status Resources We had classified constraints as sca...

Status Resources We had classified constraints as scarce and abundant, depending respectively on whether or not the optimum solution "consumes" the entire available amount of t

EOQ, a annual sales are 585000 unit. the purchase price per unit is $2. the...

a annual sales are 585000 unit. the purchase price per unit is $2. the carrying cost is 26% of purchase price of goods safty stock is 100000 units on hand two weeks are required fo

Explain the stock turnover ratio, Stock turnover ratio  Meaning: thi...

Stock turnover ratio  Meaning: this ratio establishes a relation ship between costs of goods sold and average inventory. Objective: the objective of component of this r

Absorption and marginal costing, opening stock unit were 8500 and closing s...

opening stock unit were 8500 and closing stock units were 6750.frofit of 61200 using managerial costing.fixed overhead absorbed rate was 3 pr unit.what is the profit using absorpti

Lock box system, Lock Box System:   In this type of system, the customers a...

Lock Box System:   In this type of system, the customers are advised to mail their payments to a post office box hired through the firm for collection purposes near their region. T

Total inventory costs formula , Total inventory costs formula Total in...

Total inventory costs formula Total inventory costs will be as follows: Total inventory costs = Purchase price cost + carrying costs + stock-out cost + order costs. Tota

Two-person-zero-sum games, Two-person, zero-sum games Two players X & Y...

Two-person, zero-sum games Two players X & Y have two alternatives. They show their choices by pressing two types of buttons in front of them but they cannot see the opponents

Master Budget, What is a pro forma financial statement and how does it rela...

What is a pro forma financial statement and how does it relate to the master budget?

Explain the product life cycle costing, Product life cycle costing It i...

Product life cycle costing It is an approach used to give a long term picture of product line profitability feedback on the effectiveness of life cycle planning and cost data t

prepare a production budget, Mosman Ltd makes a single product. The projec...

Mosman Ltd makes a single product. The projected sales for the first month of the coming year and the starting and ending inventory data are as follows:   Sales  80,000 units Uni

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