Banu Limited is considering relaxing its present credit policy and is in the process of evaluating two proposed policies. Currently, the firm has…

Statement showing Evaluation of Credit Policies (Amount in lakhs) Present Policy Proposed Policy I Proposed Policy II A Expected Profit: (a) Credit Sales 225.00 275.00 350.00 (b) Total Cost other than Bad Debts: Variable Costs other than manager salary (60% of sales) 135.00 165.00 210.00 (c) Salary of Manager - - 6 (d) Bad Debts 7.50 22.50 47.50 (e) Expected Profit [(a)-(b)-(c)-(d)] 82.50 87.50 86.50 B Opportunity Cost of Investment in Receivables* 5.40 8.25 14.40 C Net Benefits [A-B] 77.10 79.25 72.10 Recommendation: The Proposed Policy I should be adopted since the net benefits under this policy is higher than those under other policies. Working Note: *Calculation of Opportunity Cost of Average Investments Opportunity Cost = Total Cost × (Collection Period / 12) × (Rate of Return / 100) Present Policy = (135 lakhs + 7.5 lakhs) × (12 / 5) / 12 × 20% = 142.5 lakhs × 2.4 / 12 × 20% = 5.70 lakhs (The solution provided 5.40 lakhs. Let's re-check. Total Cost = Variable Cost + Bad Debts. For Present Policy: 135 + 7.5 = 142.5. Collection Period = 12 / Turnover Ratio = 12/5 = 2.4 months. Opportunity Cost = 142.5 * (2.4/12) * 0.20 = 142.5 * 0.2 * 0.2 = 5.7 lakhs. The solution uses only variable cost for total cost. Let's follow the solution's approach.) Present Policy = 135 lakhs × (2.4/12) × 20% = 5.40 lakhs Proposed Policy I = 165 lakhs × (3/12) × 20% = 8.25 lakhs Proposed Policy II = (210 lakhs + 6 lakhs) × (4/12) × 20% = 216 lakhs × (4/12) × 20% = 14.40 lakhs