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

Sharma Traders sells on credit with terms of net 60 days. Annual credit sales are Rs 36,00,000 (360-day year), spread evenly. Variable cost is 75% of sales and the required pre-tax return on investment is 20%. Receivables are to be valued at variable cost. The investment in receivables carrying cost for the year is:

The carrying cost is Rs 90,000. Average receivables at sales value are Rs 6,00,000 (60 days of sales), which at 75% variable cost gives an investment of Rs 4,50,000. Applying the 20% required return gives Rs 90,000.

  1. ARs 90,000Correct
  2. BRs 1,20,000
  3. CRs 1,35,000
  4. DRs 1,80,000

Explanation

Average receivables at sales value = 36,00,000 x 60/360 = Rs 6,00,000. At variable cost = 6,00,000 x 75% = Rs 4,50,000. Carrying cost = 4,50,000 x 20% = Rs 90,000. Rs 1,20,000 results from using sales value of receivables, which is wrong because the investment is measured at cost.

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