MANAGEMENT OF DEBTORS

(1) A firm is currently selling a product @ `10 per unit. The most recent
annual sales (all credit) were 30,000 units. The variable cost per unit is `6
& the average cost per unit, given a sales volume of 30,000 units, is `8. The
total cost is `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% increase in units sales; the average collection
period would increase to 45 days with no change in bad debts expenses. It
is also expected that increase sales will result in additional net working
capital to the extent of `10,000. The increase in collection expenses may be
assumed to be negligible. The required return on investment is 15% should
the firm relax the credit standards?

(2) A firm is contemplating an increase in the credit period from 30 to 60

days. 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% to 3% 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 `8. The variable cost & sales per unit is `6
& `10 per unit respectively. Assume the firm expects a rate of return of 15%.
Should the firm extend the credit period?
(3) A firm is contemplating stricter collection policies. The following details
are available:
i) At present, the firm is selling 36,000 units on credit at a price of `32 each,
the variable cost per unit is `25 while the average cost per unit `29, average
collection period is 58 days, & collection expenses amount to `10,000 bad
debts are 3%. Calculate on sales always.
ii) If the collection procedures are tightened, collection charges amounting
to `20,000 would be required, bad debts will be 1%, the collection period will
be 45 days, sales volume is likely to decline by 500 units.
Assuming a 20% rate of return on investments, would be your
recommendation? Should the firm implement the decision?

(4) Super sports, dealing in sports goods, has an annual sale of `50 lakh &
currently extending 30 days credit to the deale` It is felt that sales can pick
up considerably if the dealers are willing to carry increased stocks, but the
dealers have difficulty in financing their inventory. The firm is, therefore,
considering shifts in credit policy. The following information is available:
Credit Policy Average Collection period (days) Annual sales (` Lakhs)
A 45 56
B 60 60
C 75 62
D 90 63
Determine which policy the company should adopt. (assume 360 days in a
year)
(5) XYZ corp. is considering relaxing its present credit policy & is in the
process of evaluating two alternative policies. Currently, the firm has annual
credit sales of `50 lakh & a/c’s receivable turnover ratio of 4 times a year.
The current level of loss due to bad debts is `1,50,000. The firm is required
to give a return of 25% on the investments in new a/c’s receivable. The
company’s variable costs are 70% of the selling price. Given the following
information, which is a better option?
Present policy Policy option 1 Policy Option 2
Annual Credit `50,00,000 `60,00,0000 `67,50,000
sales
Accounts 4 3 2.4
receivable
Bad debts 1,50,000 3,00,000 4,50,000

(6) H Ltd. has at present annual sales value of 10,000 units at `300 per unit
& fixed cost amount to `3,00,000 p.a. The present credit period allowed by
the company is 1 month. The company is considering a proposal to increase
the credit period to 2 months & 3 months & has made the following estimates
Existing Proposed
Credit policy (month) 1 2 3
Increase in sales (%) -- 15 30
Bad debts (%) 1 3 3
There will be increase in fixed cost `50,000 on a/c of increase in sales
beyond 25% of present level. The company plans a pre-tax return of 20%
on investment in receivables.
You are required to calculate the most paying credit policy for the company.
(7) Golden syntax has annual sales of `24,00,000. The selling price per unit
is `10 & the variable cost is 70% of the selling price. The required rate of
return on Investment is 20%, Average cost `9 per unit, annual collection
expenditure `50,000 of default is 3%. Credit terms 2 months. Golden
syntax is considering the change in credit policy by following programme A
or programme B.
Expenses Programme
A B
Average collection period (months) 2 1.5 1
Annual collection expenditure (`) 50,000 75,000 1,50,000
% of default 3 2 1
Determine which collection programme should golden syntax follow?

(8) In order to increase sales from the normal level of `2.4 lakh p.a. the
marketing manager submits a proposal for liberalizing credit policy as under:
normal sales `2.4 lakh, normal credit period 30 days.
Proposed increase in credit period beyond normal Increase in normal
30 days sales
15 `12,000
30 `18,000
45 `21,000
60 `24,000
The contributions to volume/profit – volume ratio is 33.33%. The company
expects a pre-tax return of 20% on investment. Evaluate the above 4
alternatives & advise the management (assume 360 days a year).
(9) Radiance garments Ltd. manufactures readymade garments & sells them
on credit basis through a network of deale` Its present sale is `60lakh p.a.
with 20 days credit period. The company is contemplating an increase in the
credit period with a view to increasing sales. Present variable costs are 70%
of sales & the total fixed costs `8lakh p.a. the company expects pre-tax
return on investment @ 25%. Some other details are given as under:
Proposed credit Average collection Expected annual
policy period (days) sales (`lakh)
I 30 65
II 40 70
III 50 74
IV 60 75
Required which credit policy should the company adopt? Present your
answer in a tabular form. Assume 360 days a year. Calculations should be
made upto two digits after decimal.

(10) A is analyzing the receivables of Jackson Co. in order to identify

acceptable collateral for a short term loan. The company’s credit policy is
2/10 net 30. The bank lends 80% on a/c’s where customers are not exceed
10 days past the net period. A schedule of jackson’s receivables, if the bank
uses a 10% allowance for cash discount & returns?

Account Amount Days Average payment period

(`) outstanding historically (in days)
74 25,000 15 20
91 9,000 45 60
107 11,500 22 24
108 2,300 9 10
114 18,000 50 45
116 29,000 16 10
123 14,000 27 48
1,08,800

(11) The credit manager of XYZ Ltd. is reappraising the company’s credit
policy. The company sells its product on terms of net 30. Cost of goods sold
is 85% of sales & fixed costs are further 5% of sales. XYZ classifies its
customers on a scale of 1 to 4. During the past 5 years, the experience was
as under:
Classification Default as a % of Average collection period in days, for
sales non defaulting a/c’s.
1 0 45
2 2 42
3 10 40
4 20 80
The average rate of interest is 15%. What conclusion do you draw about the
company’s credit policy? What other factors should be taken into a/c before
changing the present policy? Discuss.

(12) A Company has prepared the following projections for a year:

Sales 21,000 units
Selling price per unit `40
Variable cost per unit `25
Total cost per unit `35
Credit period allowed One month

The company proposed to increase the credit period allowed to its customers
from one month to two months. It is envisaged that the change in the policy
as above will increase the sales by 8%. The company desires a return of
25% on its investment. You are required to examine & advice whether the
proposed credit policy should be implemented or not.