Example of cash discount, Managerial Accounting

Assignment Help:

M/s ABC's present credit terms are 1/10 net 30 that they are planning to change to 2/10 net 30.  The current average collection period is 20 days and the variable cost to sales ratio is 85 and the cost of capital is 10%.  The proportion of sales on that customers now take discount is .5. After relaxation of discount terms this is assumed that the ACP will decrease to 14 days, sales will rise from Rs.80 lakhs to Rs 85 lakhs and the proportion of discount sales will rise to .8. Tax rate for the firm is 40% compute the effect of above modifications on net profit.

Solution:

? I = (ACPn - ACP0) [S0/360] + V(ACPn)( ?S/360)

? I = 80/360 (20 - 14) - .85 × 5/360 × 14

= 1.1680555 lakhs

 ? DIS   = Pn (S0+ ? S) dn  - P0S0d0

= .96 lakhs

? NP    = ? S (1 - v) - ? DIS] (1 - t) + k ?I

= [5 (1 - .85) - .96] (1 - .4) + .1 ×1.1680555

= (.75 - .96) (.6) + .116805555

=  - .126 + .11680555

=  - .009194 lakhs

As the increase in net profit is negative the cash discount policy must not be liberalized.


Related Discussions:- Example of cash discount

#title.cost control and cos reduction., what does it mean by improving mate...

what does it mean by improving materials usage in an organization?

Explain skimming pricing, Explain Skimming pricing It is one of the mos...

Explain Skimming pricing It is one of the most commonly discussed pricing method is the skimming pricing. This pricing method to the firm's desires to skim the market by sellin

Marketing decisions, Marketing refers to the promotion of products, ...

Marketing refers to the promotion of products, especially advertising and branding. But marketing includes product management, pricing, prom

Mortgages, You want to purchase a house that costs $325,000. You have a dow...

You want to purchase a house that costs $325,000. You have a down payment of $65,000 and will take out a mortgage to make up the difference. The AMC Mortgage Corporation offers a q

Describe the algebraic method of the break even point, Algebraic method of ...

Algebraic method of the break even point The break even point can be computed by the following method: a) Units of sales volume . b) Budget total or in terms of money va

International management challenges of globalization., what is the topic ab...

what is the topic about? what are the practical implications? what are the practical criticisms?

Strengths and weakness of net book value and paybac, Strengths and weaknes...

Strengths and weakness of net book value and pay back method

Adjacent extreme points, Adjacent extreme points differ in only one variabl...

Adjacent extreme points differ in only one variable The first observation indicates that we can identify the extreme points of the solution space algebraically by setting zero as

Model construction, Model Construction The success of a simulation exer...

Model Construction The success of a simulation exercise is related to the predictive quality of the underlying model, so that considerable care should be taken with model const

What is budgetary control, What is Budgetary control Budgetary control...

What is Budgetary control Budgetary control is the process of determining various budgeted figures for the enterprises for the future period and then comparing the budgeted fi

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd