AKASH AGARWAL

CLASSES
SOLUTION
CMA INTER GROUP 2 TEST SERIES
FINANCIAL MANAGEMENT MARKS: 20

SOLUTION 1 )
Evaluation of proposed credit policies
Present Proposed (Number of
days)
(20) I (30) II (40) III (50)
(a) Sales revenue 60 65 70 74
Less: Variable costs (VC) 42 45.5 49 51.8
Total Contribution 18 19.5 21 22.2
Less: Fixed Cost (FC) 8 8 8 8
Profit 10 11.5 13 14.2
Increase in profit due to increase in total
contribution compared to present profit --- 1.5 3 4.2
(b) Investment in debtors/receivables:
Total costs (V+FC) 50 53.5 57 59.8
Debtors turnover ratio (DT)
(360Average collection period) 18 12 9 7.2
Average investment in debtors
(Total costDT) 2.78 4.46 6.33 8.31
Additional investment compared to
present level -- 1.68 3.55 5.52
Cost of additional investment @25% -- 0.42 0.89 1.38
(c) Incremental profit [(a) (b)] -- 1.08 2.11 2.82
Recommendation: Policy III (average collection period 50 days) is recommended as it yields
maximum profit.

SOLUTION 3:

The costs with respect to maintenance of receivables can be identified as follows:

(i) Capital Costs: Maintenance of accounts receivable results in blocking of the firm’s
financial resources in them. This is because there is a time lag between the sale of goods
to customers, the payments by them. The firm has, therefore, to arrange for additional
funds to meet its own obligations, such as payment to employees, suppliers of raw
materials, etc.
(ii) Administrative Costs: The firm has to incur additional administrative costs for maintaining
accounts receivable in the form of salaries to the staff kept for maintaining accounting
records relating to customers, cost of conducting investigation regarding potential credit

Akash Agarwal Classes 8007777042 / 043

 customers to determine their credit worthiness etc.
(iii) Collection Costs: The firm has to incur costs for collecting the payments from its credit
customers. Sometimes, additional steps may have to be taken to recover money from
defaulting customers.
(iv) Defaulting Costs: Sometimes after making all serious efforts to collect money from
defaulting customers, the firm may not be able to recover the overdues because of the
inability of the customers. Such debts are treated as bad debts and have to be written off
since they cannot be realised.

SOLUTION 4

1. Higer 2. cash
3. minus 4. Operating cycle
5. Operating cycle

SOLUTION 2:

Year 1 Year 2
Current Assets: (20/96) x360 (27/135)x360
1. Raw Material Stock= Stock of raw =75 days =72 days
materials/Purchases x 360
2. W1P turnover=(WlP/COGS)x360 (14/140) x360 (18/180)x360
=36 days =36 days
3. Finished goods turnover= (Finished goods/COGS) (21/140) x360 (24/180)x360
x360 =54 days =48 days
4. Debtors Turnover=(Debtors/Sales) x360 (32/160) x360 (50/200)x360
=72 days =90 days
Total (A) 237 days 246 days
Creditors period =(Creditors/Purchases)x360 (16/96)x360 (18/135)x360
=60 days =48 days
Total (B) 60 days 48 days
Operating Cycle=(A-B) (237-60) (246-48)
=177days =198 days
Abbreviation used: COGS – Cost of Goods Sold.

Akash Agarwal Classes 8007777042 / 043

Akash Agarwal Classes 8007777042 / 043