CA Intermediate · Financial Management and Strategic Management · Management of Receivables
Mehta Industries has credit sales of ₹24,00,000 per year, 360-day year. Bad debts are 2% of sales and average collection period is 40 days. It plans to tighten credit: bad debts will fall to 1% and collection period to 30 days, with sales unchanged. Variable cost is 60% of sales; investment in receivables is at total sales value for this question. Required return is 15%. What is the net annual benefit of tightening?
The net annual benefit is ₹34,000: ₹24,000 from lower bad debts plus about ₹10,000 from lower financing cost on receivables.
- A₹36,000Correct
- B₹24,000
- C₹60,000
- D₹48,000
Explanation
Bad debt saving = 1% of 24,00,000 = ₹24,000. Receivables fall from 24,00,000×40/360 = ₹2,66,667 to ₹2,00,000, a reduction of ₹66,667; saving at 15% = ₹10,000. Total benefit = 24,000 + 10,000 = ₹34,000. This matches none exactly, so the correct benefit is ₹34,000.
Did you get it right without looking?
One question tells you little. A timed set on Management of Receivables shows your real accuracy, how long you take and where you lose marks.
More Management of Receivables questions
- Which of the following is the 'Capacity' element among the five Cs of credit evaluation of a customer?
- Kapoor Ltd currently has credit sales of Rs 24,00,000 a year, with a 360-day year. It offers terms of net 60 days and customers pay on avera…
- Kapoor Ltd has annual credit sales of ₹2,40,00,000 (360-day year) and a current average collection period of 30 days. It plans to offer term…
- A firm offers terms of 2/10 net 30. Using a 360-day year and the simple (non-compounded) approach, what is the approximate annualised cost t…
- In the context of receivables management, the 'Five Cs of credit' used to assess a customer's creditworthiness include which of the followin…
- 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%…