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And 20% return on investment needed indicates that 20% is the cost of finance borrowed?
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Hello sir
I have two problems in this example
1, how did he calculate contribution margin is confusing. My way would have been 125%-75%÷ 125%=40%.
2. In step ‘b’ he calculates the new accounts receivables by multiplying $2250000*1/6 while it should be multiplied by 2/12 as the new collection period is 2 months and its out of 12 months in total. Although answer frm both ways r the same but the concept behind their calc is cnfusing.Please explain the logic/concept behind their calculations.thanks alot 🙂
- Topics: 2
- Replies: 12
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Hello sir
I have two problems in this example
1, how did he calculate contribution margin is confusing. My way would have been 125%-75%÷ 125%=40%.
2. In step ‘b’ he calculates the new accounts receivables by multiplying $2250000*1/6 while it should be multiplied by 2/12 as the new collection period is 2 months and its out of 12 months in total. Although answer frm both ways r the same but the concept behind their calc is cnfusing.Please explain the logic/concept behind their calculations.thanks alot 🙂
I cant see my post .posting it again n again .did it twice yesterday
- Topics: 2
- Replies: 12
- ☆
Hello sir
I have two problems in this example
1, how did he calculate contribution margin is confusing. My way would have been 125%-75%÷ 125%=40%.
2. In step ‘b’ he calculates the new accounts receivables by multiplying $2250000*1/6 while it should be multiplied by 2/12 as the new collection period is 2 months and its out of 12 months in total. Although answer frm both ways r the same but the concept behind their calc is cnfusing.Please explain the logic/concept behind their calculations.thanks alot 🙂
I am sorry, but I do not have the BPP Study Text – only the Revision Kit.
(If you are watching my free lectures then you do not actually need a Study Text – the lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well)
As far as your second point is concerned, multiplying by 2/12 is the same as multiplying by 1/6 – divide the top and bottom by 2 (this is basic arithmetic).
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Grabbit Quick Co achieves current annual sales of $1,800,000. The cost of sales is 80% of this amount, but bad debts average 1% of total sales, and the annual profit is as follows.
$ Sales 1,800,000 Less cost of sales 1,440,000
360,000 Less bad debts 18,000 Profit 342,000
The current debt collection period is one month, and the management consider that, if credit terms were eased (Option A), the effects would be as follows.
Present policy Option A Additional sales (%) – 25% Average collection period 1 month 2 months Bad debts (% of sales) 1% 3%
The company requires a 20% return on its investments. The costs of sales are 75% variable and 25% fixed. Assume there would be no increase in fixed costs from the extra revenue and that there would be no increase in average inventories or accounts payable. Which is the preferable policy, Option A or the present one?- Topics: 2
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Solution
The increase in profit before the cost of additional finance for Option A can be found as follows.
(a) $ Increase in contribution from additional sales 25% ? $1,800,000 ? 40%*
Less increase in bad debts (3% ? $2,250,000) – $18,000 Increase in annual profit
* The contribution/sales ratio is 100% – (75% ? 80%) = 40%
180,000 49,500 130,500
(b) $ 375,000 -150,000 =225,000
Proposed investment in accounts receivable $2,250,000 ? 1/6 Less current investment in accounts receivable $1,800,000 ? 1/12 Additional investment required
Cost of additional finance at 20% $45,000
(c) As the increase in profit exceeds the cost of additional finance, Option A should be adopted.- Topics: 2
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Copy n paste doesnt work well .so its messed up. I better start watching the lectures 🙂 thankyou
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