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

Costs and benefits of factoring, Two types of costs concerned in factoring ...

Two types of costs concerned in factoring are as: 1) The service fee or factoring commission 2) The interest on advances granted through the factor to the firm. Factoring

What is kaizen, What is kaizen Kaizen is the Japanese term for continuo...

What is kaizen Kaizen is the Japanese term for continuous improvement. The kaizen concept was pioneered by in Japan by Toyota as daily challenge to all its to improve their pro

Explain variable cost and fixed cost, Explain variable cost and fixed cost ...

Explain variable cost and fixed cost Variable costs: costs that vary almost in the direct proportion to the volume of production are known as variable costs. The examples of

What are the limitation of performance budgeting, What are the Limitation o...

What are the Limitation of performance budgeting 1) It dose not facilitate qualitative evaluation. 2) The success depends on the well organized departments, but this may not b

Job-Order Costing, Compute the ending balance in the Work in Process invent...

Compute the ending balance in the Work in Process inventory account. Assume that this balance consists entirely of goods started during the year. If $32,200 of this balance is dire

Select the cost driver-cost estimating relationship, Select the cost driver...

Select the cost driver(s): This might also be termed to as independent, explanatory or predictor variable. A cost driver can be stated as any factor whose change causes a chang

Describe the graphic method of break even analysis, Graphic method of break...

Graphic method of break even analysis or break even chart The break even point can also be computed graphically. A break even chart is a graphical representation of marginal co

Functions of the treasury department, The significant functions of a treasu...

The significant functions of a treasury department are as given below: a) Setting up corporate financial goals Financial strategies and aim Treasury and financial po

Point estimate of probabilities, POINT ESTIMATE OF PROBABILITIES This a...

POINT ESTIMATE OF PROBABILITIES This approach requires a number of different values for each of the uncertain variables to be selected. These might be values that are reasonabl

Factory layout-jit features, Factory Layout The first stage of implemen...

Factory Layout The first stage of implementing the JIT manufacturing techniques is to rearrange the factory floor away from the batch production functional layout towards a pro

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