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Managing receivable

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Managing receivable

  • This topic has 7 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • October 16, 2015 at 6:28 pm #276711
    alighere
    Participant
    • Topics: 46
    • Replies: 67
    • ☆☆

    Hi John .

    Please help me with the foll. qn:

    A company is proposing an increase in the credit period that it gives to customers from one month to one an a half month calendar months. The aim is to increase revenue. Current annual revenue – 24mn USD; 4m units each sold at 6$. Each unit costs 5.40 $ to make. The increase in the credit period is likely to generate 150,000 extra unit sales. Is this enough to justify extra costs given the company’s required rate of return is 20%.

    The biggest problem i’m facing is what is the context of “…the company’s required rate of return is 20%..”

    Thanks in adv

    October 17, 2015 at 9:12 am #276773
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    You would use the 20% in the same way as you would if they were paying 20% overdraft interest.
    So the longer credit is effectively costing them interest, but the increased sales are earning them more profit.
    They need to compare the extra profit from the goods with the extra interest involved to decide whether or not it was worth doing.

    October 17, 2015 at 9:15 am #276774
    alighere
    Participant
    • Topics: 46
    • Replies: 67
    • ☆☆

    You mean it can either be interest earned or interest payable. Like time value of money.

    October 17, 2015 at 9:25 am #276780
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    Precisely 🙂

    October 18, 2015 at 9:52 am #276959
    alighere
    Participant
    • Topics: 46
    • Replies: 67
    • ☆☆

    Isn’t this made in the two assumption that: the money is always supposed to be invested or if there is always supposed to be an overdraft. . .

    October 18, 2015 at 11:10 pm #277087
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    If there is an overdraft then the cost is the overdraft interest.
    If there is not an overdraft then the cost is the interest that is lost by having less to invest.

    Either way, it is still effectively a cost – whether you pay interest directly or whether you lose interest that you could have earned.

    October 22, 2015 at 11:52 am #278387
    alighere
    Participant
    • Topics: 46
    • Replies: 67
    • ☆☆

    Hey John. Please help me. Is my answer correct.

    A Co is considering increasing the period of credit form one calendar month to 2 months. Annual sales are currently 2.4m usd. Annual profits 120,000$. Extending credit would increase sales by 20%. Margins remain unchanged. Required rate of return 15%.

    What is the financial effect of proposal?

    I got decrease by 18000

    October 22, 2015 at 4:33 pm #278434
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    Current receivables are 1/12 x 2.4M = 200,000
    New receivables are 2/12 x (2.4M x 1.2) = 480,000

    So the extra interest cost = (480,000 – 200,000) x 15% = 42,000

    The extra profit = 20% x 120,000 = 24,000.

    So there is a decrease of 42,000 – 24,000 = 18,000.

    So your answer is correct 🙂 🙂

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