Oggy Limited has a current credit sales of 7,20,000. It is considering revising its credit policy. The proposed terms of credit will be "2/10, net…

3. (a) Advise to Oggy Limited regarding Change in Credit Policy Particulars (₹) Current Credit Sales 7,20,000 Increase in Credit Sales 20,000 New Level of Credit Sales 7,40,000 Current Average Collection Period (Days) 30 New Average Collection Period (Days) 20 Current Level of Receivables [₹ 7,20,000 × (30 / 360)] 60,000 New Level of Receivables [₹ 7,40,000 × (20 / 360)] 41,111 Cash Discount 2% Discount Period (Days) 10 Percentage of Customers Taking Discount 50% Bad Debt Losses 2% Variable Cost 70% Corporate Tax Rate 50% Opportunity Cost of Capital 10% (A) Increased Credit Sales 20,000 (B) Contribution from Increased Credit Sales [A x (1-0.70)] 6,000 (C) Bad Debt Loss [A x 2%] 400 (D) Cost of Cash Discount [₹ 740,000 x 0.02 x 0.5] 7,400 (E) After-tax Profit [ (B - C - D) x (1-0.5)] (900) (F) Decrease in Receivable Investment [₹ 41,111 -60,000] (18,889) (G) Expected Return (E/F) 4.8% (H) Net Gain % [10% - G] 5.2% Therefore, Oggy Limited should change the credit policy because it results in net gain of 5.2%.