Management of Receivables

1. A company is currently selling 1,00,000 units of its product at Rs. 50 per

unit. At the current level of production, the cost per unit is Rs. 45, variable
cost being Rs. 40 per unit. The company is currently extending one month’s
credit to its customers. It is thinking of extending credit period to two
months in the hope that sells will increase by 25%. If the required rate of
return is 30%, is the new credit policy desirable.
2. An analysis of credit policy reveals that it is very loose and as a result the
firm’s collection period is very long as well as bad debts losses are built up.
The firm therefore is thinking to tighten up its credit standards by shortening
credit period from 45 days to 30 days. The expected result of this policy
would be reduce sales from Rs. 6,00,000 to Rs. 5,00,000 and bad debts
losses from 4% to 2% and collection expenses from 2% to 1% of total sales.
The firm’s variable cost ratio is 80%, tax rate is 40% and after tax cost of
component is 12%. Should credit standards be tightened up?
3. A group of customers with 10% risk of non payments desires to establish
business connections with you. This group would require 1.5 months of
credit is likely to increase sales by Rs. 60,000 p.a.. The variable cost is 80%
of sales. The Income tax rate is 50%. Should you accept the offer if the
required rate of return is 40%.

4. A firm has current sales of Rs. 7, 20,000. It is considering to offer the credit
terms ‘2/10 net 30’instead of net 30. It is expected that sales will increase by
Rs. 20000 and average collection period will decline from 30 days to 20
days. It is also expected that 50% of the customers will avail the discounts
and pay on 10th day and the remaining 50% will pay on 30th day. Bad debts
 losses will remain on 2% of sales. The firm’s variable cost ratio is 70%,
corporate tax rate is 50% and the opportunity cost of investment in
receivables is 10%. Should the company change its credit terms?
5. Hypothetical Ltd. has annual credit sales of Rs. 800000. Its average age of
accounts receivable is 60 days. It is contemplating a change in its credit
policy that is expected to increase sales to Rs. 1000000, and increase the age
of receivable to 72 days.
Its sale price is Rs. 25 per unit, the variable cost per unit is Rs. 12 and the
average cost per unit is Rs. 17. Calculate the following:
a. What are the average accounts receivable with both the present and
proposed plans?
b. What is the average cost per unit with the proposed plan?
c. What is the marginal investment in accounts receivables resulting from
the proposed change?
d. What is the cost of marginal investment, if the assumed rate of return is
15%.
6. A small sized firm feels that its credit sales are too high. It is contemplating
to tighten its credit standards, as a result of which it is expected that bad
debts losses will reduce to 1% from the present level of 4%. However
tightening of credit standards is likely to cause a fall in sales from Rs. 20
lakh per year to 18 lakh per year.
Should the firm tighten its credit standards, assuming its contribution to
volume ratio is 40%, its fixed costs are Rs. 2 lakh and the average
investment in debtors does not change?
7. XYZ Ltd. Has credit sales amounting to Rs. 32,00,000. The Sales price is
Rs. 40 per unit, the variable cost is Rs. 25 per unit while the average cost per
unit is Rs. 32. The average age of accounts receivables of the firm is 72
days.
The firm is considering to tighten its credit standards. It will result a fall in
sales to Ts. 28,00,000, and the average age of accounts receivables to 45
days.
Assume 20% rate of return. Is the proposal under consideration feasible.
8. Hypothetical Ltd. is examining the question of relaxing its credit policy.
Presently it is selling 2000 units at a price of Rs. 100 per unit, the variable
cost per unit is Rs. 88 and average cost per unit is Rs. 92.
All the sales are on credit basis and the average collection period is 36 days.
A relaxed policy is expected to increase sales by 10% and the average age of
receivable to 60 days. Assuming 15% return, should the firm relax its credit
policy.
9. Udar Ltd. believes that it is possible to increase sales if credit
terms are relaxed. The profit plan, based on the old credit terms
envisages projected sales at Rs. 10,00,000, a 30% profit volume
ratio, fixed costs at Rs. 50,000, bad debts of 1% and an account
receivable turnover of 10 times.
The relaxed credit policy is expected to increase sales to Rs.
12,00,00. However, bad debts will rise to 2% of sales, and
accounts receivable turnover will decrease to 6 times.
Should the company adopt the relaxed credit policy, assuming the
company’s target rate of return is 20%.
10. The credit manager of ABC Ltd. has to decide on a proposal for liberal
extension of credit which would result in slowing process of the average
collection period from 1 to 2 months. The company’s product is sold for Rs.
20 per unit, of which Rs. 15 represents the variable cost. The current actual
sales amount to Rs. 24 lakh, represented entirely by credit sales. The average
cost per unit is Rs. 18.
The relaxation in credit policy is expected to result in 25% increase in sales.
The corporate manager aims at a return of 25% on additional investment.
Make relevant calculations to help the credit manager in examining the
financial implications of liberalizing the credit policy.
11. ABC Ltd. is now extending 1 month’s credit to its selected customers. It
sells its product at Rs. 100 each, and has an annual sales volume of 60,000
units. At current level of production, the product has a total cost of Rs. 90
per unit and a variable cost of Rs. 80 per unit. The company is considering a
plan to grant more liberal terms by extending the duration of credit from 1
month to 2 months and expects the sales to the customer group to grow up
by 25%. In the background of a normal expectation of a 20% return on
investment, will this relaxation in credit standards justify itself?