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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

Meenakshi Traders has annual credit sales of Rs 36,00,000 and allows a credit period of 45 days. Assume a 360-day year. Variable cost is 80% of sales. The required rate of return on investment in receivables is 15%. Investment in receivables is measured at variable cost. What is the cost of carrying receivables for the year?

The carrying cost is Rs 54,000. Variable cost of sales is Rs 28,80,000, so average investment in receivables for 45 days is Rs 3,60,000, and 15% of this gives Rs 54,000. Using full sales value instead of variable cost would overstate the investment.

  1. ARs 54,000Correct
  2. BRs 67,500
  3. CRs 81,000
  4. DRs 43,200

Explanation

Variable cost = 80% of 36,00,000 = 28,80,000. Average receivables at cost = 28,80,000 x 45/360 = 3,60,000. Carrying cost = 15% x 3,60,000 = Rs 54,000. Rs 67,500 wrongly uses sales value (4,50,000 x 15%). Rs 81,000 uses 90 days.

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