Case Study

Mr. Binit, Finance manager of S Ltd. is evaluating the present credit policy of his company. Under the present policy the company is offering 3% discount for payment within 10 days. The analysis of accounts receivable shows an average collection period of 30 days. Mr. Binit is of the opinion that the discount should be discounted as it is affecting the profitability of the company in the present scenario of rising manufacturing cost. It is estimated that if the discount is discontinued the average collection period would increase to 35 days. Presently 30% of the total customers are availing discount and if the discount is withdrawn, these customers can also be expected to pay along with the other customers. The marketing manager informed him that as a result sales might drop 2,10,000 units to 2,00,000 units per year. The selling price per unit is Rs.45. The average cost per unit is Rs.50 and variable cost to sales ratio is 75%. The required rate of return on the company`s investment is 20%.

Question 1:- Savings in receivables investment due to decrease in sales will be_______.

a) Rs.32,480.50

b) Rs.32,812.50

c) Rs.31,812.50

d) Rs.32,012.50