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

Transfer pricing-purposes, Transfer Pricing Transfer pricing can contri...

Transfer Pricing Transfer pricing can contribute directly to the process of departmental performance measurement and indirectly to the measurement of product performance. A

Case study, Anderson Nuclear Power Plant will be "mothballed" at the end of...

Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses

The value chain and cost analysis, The Value Chain and Cost Analysis The ...

The Value Chain and Cost Analysis The behavior of a firm's costs and its relative cost position stem from the value activities the firm performs in competing in an industry. A me

Preparation of comparative balance sheet, Problem From the following ba...

Problem From the following balance sheets of Dramas Ltd., compute the trend percentages using 31st December 2005 as the base year. Assets & Liabilities

What specifically caused your emotional response?, What story or character ...

What story or character in a story generated what Aristotle calls a "catharsis?" Describe your emotional response. What specifically caused your emotional response?

Benefits/ disadvantages of the costing techniques , Question 1 A healt...

Question 1 A healthcare company specializes in hip, knee and shoulder replacement operations, known as surgical procedures. As well as providing these surgical procedures, the

Support each classification with appropriate rationale., For this assignmen...

For this assignment, please complete and submit Task 1 and Task 2 as described below. Task 1: Classifying Cash Flows The following are transactions, events, and changes in balances

What are the disadvantages of budgetary control, What are the Disadvantages...

What are the Disadvantages of budgetary control 1) Uncertain future: the budgets are prepared for the future period. Despite best estimates made for the predictions may not

Innovations of management accounting and control, Implementing management a...

Implementing management accounting and control innovations are often problematic. Provide a brief commentary around the key factors necessary to give such innovations the best chan

Explain the features of budgetary control, Explain the Features of budgetar...

Explain the Features of budgetary control From the definition the following features of budgets control emerge: 1) Establishment of budgets: budgets are prepared for each

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