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

The incredible game theorist, The Incredible game theorist Mr. Nash's w...

The Incredible game theorist Mr. Nash's work needed refining. First, it applies to games played only once, or in which players move simultaneously. But virtually all interestin

Transfer pricing, find full-cost& variable cost using transfer pricing meth...

find full-cost& variable cost using transfer pricing method

Non-zero lead time, Non-zero lead time (determining reorder point) This...

Non-zero lead time (determining reorder point) This basic EOQ model assumes that the suppliers lead time is zero (i.e. goods are delivered immediately on the day the order was

State programmed budget, Explain about Programmed budget It having expe...

Explain about Programmed budget It having expects revenues and cost of various products or projects that are termed as the main programmers of the firm. Such a budget can be pr

Extra shift decision, EXTRA SHIFT DECISION These decisions are concerne...

EXTRA SHIFT DECISION These decisions are concerned with whether or not a company should work for 8 hrs, 16hrs, or 24 hrs a day or week days only or weekends also.  The factors

Choosing relationship predicts best variable-cost estimating, Choose the re...

Choose the relationship which best predicts the dependent variable After exploring a diversity of relationships, you should select the one that can best be employed in predicti

Case study, 1 Describe the impact of different types of standards on motiva...

1 Describe the impact of different types of standards on motivations, and specifically, the likely effect on motivation of adopting the labor standard recommended for Geeta & Compa

Ageing schedule, Ageing Schedule: AS is classifies outstanding accounts r...

Ageing Schedule: AS is classifies outstanding accounts receivable at a specified point of time into various age brackets. A clarifying ageing schedule is specified below.

State the important assumptions of break-even analysis, Assumption of break...

Assumption of break even analysis The break even analysis is based upon the following assumptions : 1) All elements of cost, i.e., production , administration and selling di

Help, Sean Corp. issued a $60,000, 10 year bond at the face rate of 8% annu...

Sean Corp. issued a $60,000, 10 year bond at the face rate of 8% annually on 1/1/X0. The market rate was 10%. How much cash will the bond investors receive at the end of the first

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