ABC Pvt. Ltd. is considering relaxing its present credit policy for accounts receivable and is in the process of evaluating two proposed policies.…

(a) Statement showing the Evaluation of Accounts Receivable Policies Particulars Present Policy Proposed Policy 1 Proposed Policy 2 A Expected Profit: (a) Credit Sales 50,00,000 60,00,000 67,50,000 (b) Total Cost other than Bad Debts: (i) Variable Costs (70%) 35,00,000 42,00,000 47,25,000 (c) Bad Debts 1,50,000 3,00,000 4,50,000 (d) Expected Profit [(a) – (b) – (c)] 13,50,000 15,00,000 15,75,000 B Opportunity Cost of Investments in Accounts Receivable (Working Note) 1,75,000 2,80,000 3,93,750 C Net Benefits (A - B) 11,75,000 12,20,000 11,81,250 Recommendation: The Proposed Policy 1 should be adopted since the net benefits under this policy are higher as compared to other policies. Working Note: Calculation of Opportunity Cost of Average Investments Opportunity Cost = Total Cost × Collection period/12 × Rate of Return/100 Present Policy = 35,00,000 × 3/12 × 20% = 1,75,000 Proposed Policy 1 = 42,00,000 × 4/12 × 20% = 2,80,000 Proposed Policy 2 = 47,25,000 × 5/12 × 20% = 3,93,750