AB Enterprises deals in hardware materials having current turnover 30 Lakhs per annum. All sales are on credit and average collection period is 30…

(a) A. Statement showing the Evaluation of Credit Policies (Total Approach) Particulars Present Credit Policy Proposed Credit Policy A B Credit Period (in days) 30 45 60 Units sold 30,000 33,000 35,000 A Expected Profit: (a) Credit Sales @100 per unit 30,00,000 33,00,000 35,00,000 (b) Total Cost other than Bad Debts (i) Variable Costs @50 per unit 15,00,000 16,50,000 17,50,000 (ii) Fixed Costs 5,00,000 5,00,000 5,00,000 20,00,000 21,50,000 22,50,000 (c) Bad Debts - 33,000 1,22,500 (d) Expected Profit [(a) - (b) - (c)] 10,00,000 11,17,000 11,27,500 B Opportunity Cost of Investments in Receivables (i)-(ii) 33,333 52,500 72,917 C Net Benefits (A - B) 9,66,667 10,64,500 10,54,583 Recommendation: The Proposed Policy A (i.e. increase in collection period by 15 days or total 45 days) should be adopted since the net benefits under this policy are higher as compared to other policies. Working Notes: (i) Calculation of Opportunity Cost of Average Investment in Receivables Particulars Present Credit Policy Proposed Credit Policy A B Credit Period (in days) 30 45 60 (a) Cost of Sales (Variable Cost + Fixed Cost) 20,00,000 21,50,000 22,50,000 (b) Average Debtors = Cost of Sales × (Credit period) / 360 1,66,667 2,68,750 3,75,000 (c) Average Creditors for extra variable cost [(Variable Cost) x 15/360] - 6,250 10,417 (d) Average Investment in Receivables or Net Working Capital = (b) – (c) 1,66,667 2,62,500 3,64,583 (e) Opportunity Cost @20% of average Investments in Receivables 33,333 52,500 72,917