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Credit management - working capital requirement - hinanifaf - 08-25-2010
Dear students
Homework exercise
Delta ltd has a current sales of 300000.To push up sales,the company is considering
a more liberal credit policy. The current average collection period of the company is
25 days. If the collection period is extended, sales increase in the following manner
Credit policy Increase in collection Increase in sales
period N$
X 15days 12 000
Y 25 27 000
Z 35 47 000
The company is selling its product at 10 each. Average cost per unit at the current level
is 8 and variable cost per unit is 6.
Now the question is if the company required a return of 12% on its investment in
receivables, which policy is desirable,use 250 days per year.
My solution
Credit Policy X
Benefits
Increase in profitability
12000 x 10 120000.00
Costs
Acc receiv-new policy 312000x10x15/250 187200
Acc receiv-current policy 300000x10x25/250 300000
Increase in acc receivable -112800
Variable cost 60%
Increase in investment -67680
Required rate of return 12%
-8121.6
Increase in opportunity cost 8121.60
Net increase in profitability 111878.40
The same applies to policy y and z.
Please any one who can comment on that do so.
Thanks
Flora