CMA Intermediate · Financial Management and Business Data Analytics · Receivable Management
Mehta Traders has annual credit sales of Rs 12,00,000 and is considering relaxing its credit standards. Incremental sales would be Rs 2,40,000, the variable cost ratio is 70%, and bad debts on the incremental sales would be 5%. Ignoring collection costs and the cost of funds invested in receivables, what is the net incremental profit from the relaxation?
The net incremental profit is Rs 60,000. Contribution on the extra Rs 2,40,000 sales at a 30% margin is Rs 72,000, and bad debts of 5% on those sales are Rs 12,000. Deducting the bad debts from the contribution gives the net gain.
- ARs 60,000Correct
- BRs 72,000
- CRs 48,000
- DRs 1,68,000
Explanation
Contribution on incremental sales = 2,40,000 x 30% = Rs 72,000. Bad debts = 5% x 2,40,000 = Rs 12,000. Net incremental profit = 72,000 - 12,000 = Rs 60,000. Rs 72,000 ignores bad debts.
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