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

Sundaram Textiles has annual credit sales of ₹7,20,000 and an average collection period of 30 days. Variable cost is 80% of sales. The required rate of return is 15%. Assume a 360-day year. What is the carrying cost of receivables, based on the investment in receivables at variable cost?

The carrying cost is ₹7,200. Average receivables are ₹60,000 (7,20,000 × 30/360). Investment at variable cost is 80% of this, ₹48,000, and 15% on it gives ₹7,200. Charging on sales value would give ₹9,000, which overstates the cost.

  1. A₹7,200Correct
  2. B₹9,000
  3. C₹8,640
  4. D₹6,000

Explanation

Average receivables = 7,20,000 × 30/360 = ₹60,000. Investment at variable cost = 60,000 × 80% = ₹48,000. Carrying cost = 48,000 × 15% = ₹7,200. Using the sales value instead gives 60,000 × 15% = ₹9,000, which wrongly ignores the variable cost basis.

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