Receivables Management

Q1.
A firm is currently selling a product @ Rs 10 per unit. The most recent annual sales (all credit)
were 30,000 units. The variable cost per unit is Rs .6 and the average cost per unit, given a sales
volume of 30,000 units, is Rs 8. The total fixed cost is Rs 60,000. The average collection period
may be assumed to be 30 days.
The firm is contemplating a relaxation of credit standards that is expected to result in a 15 per
cent increase in units sales; the average collection period would increase to 45 days with no
change in bad debt expenses. It is also expected that increased sales will result in additional net
working capital to the extent of Rs 10,000. The increase in collection expenses may be assumed
to be negligible. The required return on investment is 15 per cent.
Should the firm relax the credit standard?
Q2.
Assume that the firm in our Example 1 is contemplating to allow 2 per cent discount for payment
within 10 days after a credit purchase. It is expected that if discounts are offered, sales will
increase by 15 per cent and the average collection period will drop to 15 days. Assume bad debt
expenses will not be affected; return on investment expected by the firm is 15 per cent; 60 per
cent of the total sales will be on discount. Should the firm implement the proposal?
Q3.
The average collection period which is at present 45 days is expected to increase to 75 days. It is
also likely that the bad debt expenses will increase from the current level of 1 per cent to 3 per
cent of sales. Total credit sales are expected to increase from the level of 30,000 units to 34,500
units. The present average cost per unit is Rs 8, the variable cost and sales per unit is Rs 6 and Rs
10 per unit respectively. Assume the firm expects a rate of return of 15 per cent.
Should the firm extend the credit period?
Q4.
A firm is contemplating stricter collection policies. The following details are available:
1. At present, the firm is selling 36,000 units on credit at a price of Rs 32 each; the variable
cost per unit is Rs 25 while the average cost per unit is Rs 29; average collection period is 58
days; and collection expenses amount to Rs 10,000; bad debts are 3 per cent.
2. If the collection procedures are tightened, additional collection charges amounting to Rs
20,000 would be required, bad debts will be 1 per cent; the collection period will be 40 days;
sales volume is likely to decline by 500 units.
Assuming a 20 per cent rate of return on investments, what would be your recommendation?
Should the firm implement the decision?