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

Determine the absolute liquid ratio - liquidity ratios, Absolute liquid rat...

Absolute liquid ratio - Liquidity ratios Although receivables debtors and bills receivable are usually more liquid than inventories yet there may be doubts regarding their rea

Explain value added analysis and top management styles, 1. Explain Value Ad...

1. Explain Value Added Analysis along with the major factors included in Management Accounting Analysis. 2 Identify the several top management styles and define their implicatio

Managerial accounting, As an MBA Managerial Accounting Student, John has as...

As an MBA Managerial Accounting Student, John has asked you to evaluate the alternatives available and make recommendations as to the best course of action, and present it in a Rep

EOQ, a annual sales are 585000 unit. the purchase price per unit is $2. the...

a annual sales are 585000 unit. the purchase price per unit is $2. the carrying cost is 26% of purchase price of goods safty stock is 100000 units on hand two weeks are required fo

When to order-material control, When to order-Material control If deliv...

When to order-Material control If deliveries from suppliers normally take two weeks to arrive, then replenishment orders should be placed with them when the level of stocks rep

Example of cash discount, M/s ABC's present credit terms are 1/10 net 30 th...

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 rat

What are the factors which led to the development of abc, What are the fact...

What are the factors which led to the development of ABC: 1) Traditional costing fails to capture cause and effect relationship 2) Traditional costing often fails to highlig

Procedure of material acquisition, Procedure of material acquisition A ...

Procedure of material acquisition A stores record is maintained into which the quantity and value of materials received is entered. Issues of materials to production are made b

Quantitative or qualitative measures, Review the options and views availabl...

Review the options and views available to answer the following questions: 1. What sort of information is being provided by the dashboard? What visual objects are used?     Wh

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