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Accounts Receivables Essay

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Ch 28: Accounts Receivable Management & Factoring

CHAPTER 28 ACCOUNTS RECEIVABLE MANAGEMENT AND FACTORING

Problem 1 Current policy A. Credit period B. Annual sales (Rs lakh) C. Inc. sales (Rs lakh), [B - 3,000] D. Cost of sales (Rs lakh), [B/10 x 8+600] E. Receivable invst. at cost (Rs cr), [D/360 x A] F. Inc. receivable invst. at cost (Rs cr), [E - 167] G. Inc. contribution (Rs lakh), [B x (10-6)/10] H. Expected rate of return (%), [G/F] I. Required rate of return (%) Note: Cost of sales includes variable cost plus fixed cost. None of the new policies is desirable since the required rate of return is higher than the expected rate of return. Cost calculations: Average cost (Rs) Unit variable cost (Rs) Price (Rs) Total cost of sales (Rs lakh) Total variable cost (Rs lakh) Total fixed cost (Rs lakh) Problem 2 Current sales (Rs cr) Current level of receivable (Rs cr) Bad debts losses (%) Incremental cost(%) Current collection period (days) New collection period (days) New levels of sales (Rs cr) New levels of receivable (Rs cr) Incremental receivable invst. (Rs cr) Contribution from addl. sales (Rs cr) Bad debts on addl. sales (Rs cr) Net contribution (Rs cr) Rate of return (%) Required rate of return (%) Net surplus return (%) 300 30 3% 80% 36 66 360 66 36 12 1.8 10.2 28.3% 15% 13.3% 25 3,000 2,400 167 Policy X 40 3,012 12 2,407 267 101 4.8 4.8% 12% Policy Y 50 3,027 27 2,416 336 169 10.8 6.4% 12% Policy Z 60 3,047 47 2,428 405 238 18.8 7.9% 12%

8 6 10 2,400 1,800 600

(30/300) x 360 36 + 30 (360/360) x 66 66 - 30 60 x 0.20 60 x 0.03 12 - 1.8 10.2/(66-30) 28.3% 15.0%

I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Problem 3 Policy Policy Policy Policy A B C D A. Collection period (days) 40 45 55 70 B. Incremental sales (Rs) 300,000 400,000 500,000 600,000 C. Inc. invst. in receivable (Rs cr), [D x 0.20] 33,333 50,000 76,389 116,667 D. Inc. contribution (Rs cr), [D x (1 - 0.85)] x (1 - .35) 29,250 39,000 48,750 58,500 E. Expected...

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