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

Mehta Industries has annual credit sales of ₹72,00,000 with an average collection period of 50 days. A new policy would tighten credit so that the average collection period falls to 30 days, with no change in sales. Variable costs are 75% of sales and the required return on investment in receivables is 20%. Assume a 360-day year and that receivables are valued at cost for the investment calculation (variable cost basis). What is the saving in carrying cost of receivables?

The saving is ₹60,000. Receivables fall from 50 to 30 days of sales, a reduction of 20 days × ₹20,000 daily sales = ₹4,00,000 at sales value, or ₹3,00,000 at 75% variable cost. At a 20% required return, the carrying cost saving is ₹60,000.

  1. A₹30,000Correct
  2. B₹40,000
  3. C₹20,000
  4. D₹60,000

Explanation

Receivables at present = 72,00,000 × 50/360 = ₹10,00,000 at sales value; at cost = 75% = ₹7,50,000. Proposed = 72,00,000 × 30/360 = ₹6,00,000; at cost = ₹4,50,000. Reduction = ₹3,00,000; at 20% the saving is ₹60,000. Checking: 20,000 daily sales × 20 days = ₹4,00,000 reduction at sales value; ×0.75 = ₹3,00,000; ×20% = ₹60,000. So the answer is ₹60,000, and the option shown first is wrong.

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