Example of credit period, Managerial Accounting

Assignment Help:

M/s ABC has an existing sales of Rs.50 lakhs and permits a credit period of 30 days to its customers.  The firm cost of capital is 10% and the ratio of variable cost to sales is 85. The firm is contemplating on rising the credit period to 60 days that would result in raised sales of Rs.5 lakhs.  The bad debts on raised sales are expected to be 8%.  The tax rate for M/s ABC is 40 percent. Must the firm extend the credit period?

Solution

? I = (ACPn - ACP0) [S0/360] + V(ACPn)( ?S/360)

? I = (60 - 30) [50/360] + 8.5 × 60 × 5/360

? I = (30) × 50/360 + .708333

?I = 4.8749997 × 1, 00,000

= 4, 87,500

= 4, 874,99.9

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

 = [5 (015 ) - 5 × .08 ] (1 - 04 ) - .10 × 4,87 ,500

=  [.75 - .4] (.6) - 4.875000

= (.35 ) (-6) - .48750

= (.21 - .48750 ) × 1,00 ,000

= - 27 ,750

The raise in credit period results in a negative net profit thus the credit period must not be extended.


Related Discussions:- Example of credit period

Value chain analysis , VALUE CHAIN ANALYSIS Every firm is a collection...

VALUE CHAIN ANALYSIS Every firm is a collection of activities that are executed to design, generate, market, deliver and support its products or services. Value chain analysis

Responsibility accounting, Responsibility Accounting This is a term use...

Responsibility Accounting This is a term used to define the measuring of performance of decentralized units, using account results. Responsibility accounting recognizes various

150 to 200 words, solutions for (POS) slow printing of sales tickets and un...

solutions for (POS) slow printing of sales tickets and unpredictable action of cash drawers. when credit approvals delayed the checkout process or when the computer was down, thus

Markov chains, Markov Chains: Markov Chains are named after the Russia...

Markov Chains: Markov Chains are named after the Russian statistician A.A Markov who developed probabilistic models that are often applicable to decision making problems in bu

Concentration banking, When the customers of the company are spread over br...

When the customers of the company are spread over broad geographical areas then in place of a particular collection centre the company opens collection centres at the regional stag

Focus on traditional standard costing - kaizen costing, What have to Focus ...

What have to Focus on Traditional standard costing In traditional cost systems focus is to meet standard cost measurement by avoiding unfavorable variances. Under kaizen coat

Computation of working capital required, Computation of Working Capital Req...

Computation of Working Capital Required 1. Operating Cycle Period = M+W+F+D-C     = 101.38 +2

Explain the scope of cost accounting, Explain the Scope of cost accounting ...

Explain the Scope of cost accounting Scope of cost accounting: the scope of cost accounting is very wide and includes the following: 1 cost ascertainment: it deals with t

Strategic plan, How to write introduction on strategy plan

How to write introduction on strategy plan

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