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Receivable management

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Receivable management

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 31, 2021 at 4:06 pm #622466
    Nikitagarwal
    Participant
    • Topics: 154
    • Replies: 147
    • ☆☆☆

    Hello Sir,
    Can you please explain me how did they calculated the contribution/sales ratio in the below question of BPP Study kit:
    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?

    June 1, 2021 at 7:29 am #622544
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    For every $100 sales, the cost of sales is $80.

    Of this $80, the variable cost is 75% x 80 = $60.

    Therefore the contribution is $40 for every $100 of sales.

    Therefore the CS ratio is 40/100 = 40%

    June 1, 2021 at 2:00 pm #622641
    Nikitagarwal
    Participant
    • Topics: 154
    • Replies: 147
    • ☆☆☆

    got it.. thanks sir 🙂

    June 1, 2021 at 4:48 pm #622666
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
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