SNS COLLEGE OF ENGINEERING
Sathy Main Road, Kurumbapalayam (Post)
Coimbatore – 641 107
Department of Management Studies
RECEIVABLES MANAGEMENT PROBLEMS
1. A firm is currently selling a product @ Rs. 10 per unit. The recent annual sales (all credit)
were 30,000 units. Variable cost per unit is Rs. 6 and the average cost per unit, given a sales
volume of 30,000 units, is Rs. 8. Fixed cost is Rs. 60,000. The average collection period may be
assumed to be 30 days.
The firm is contemplating a relaxation of credit standards that is expected to result in a 15 %
increase in units sales; the average collection period would increase to 45 days with no change
in bad debts. It is also expected that increased sales will result in additional net working capital
to the extent of Rs.10,000. The increase in collection expenses may be assumed to be negligible.
The required return on investment is 15%.
Should the firm relax the credit standard?
Answer: (+18,000, -2,006.25, - 1,500) Relax
2. Assume that the above firm is contemplating to allow 2% discount for payment within 10
days after a credit purchase. It is expected that if discounts are offered, sales will increase by
15% and the average collection period will drop to 15 days. Assume bad debt expenses will not
be affected; return on investment expected by the firm is 15%; 60% of the total sales will be on
discount. Should the firm implement the proposal?
Answer: (+18,000, +1331.25, -4,140) Offer CD
3. Suppose a firm is contemplating an increase in the credit period from 30 to 60 days. The
average collection period which is at present 45 days is expected to increase to 75 days. It is also
likely that the bad debts will increase from the current level of 1% to 3%. Total credit sales are
expected to increase from the level of 30,000 units to 34,500 units. Present average cost per unit
is Rs.8, the variable cost and sales per unit is Rs.6 and Rs.10 per unit respectively. Assume the
firm expects a rate of return of 15%. Should the firm extend the credit period?
Answer: Net gain Rs. 6,806.25 Extend C period
4. A firm is contemplating stricter collection policies. The following details are available:
At present, the firm is selling 36,000 units on credit at a price of Rs. 32 each; the variable cost
per unit is Rs.25 while the average cost per unit is Rs. 29; average collection period is 58 days;
and collection expenses amount to Rs.10,000; bad debts are 3%.
If the collection procedures are tightened, additional collection charges amounting to Rs.20,000
would be required, bad debts will be 1%; the collection period will be 40 days; sales volume is
likely to decline by 500 units.
Compiled by N. Chidambaram, Faculty/MBA, SNSCE
Page : 1
Assuming a 20% rate of return on investments, what would be your recommendation? Should
the firm implement the decision? Answer: Net gain Rs.10,418 Implement the proposal
5. A firm is considering an increase in its credit period from 30 days to 60 days. It currently sells
3,00,000 units for Rs.3 each. The average age of receivables is 40 days; bad debts are 0.5%; the
variable cost per unit is Rs.2.30 and the average cost per unit is Rs.2.60. The change in the credit
period is expected to increase sales to 3,40,000 units; bad debts will increase to 2% and the
average collection period to 72 days. Assume the required rate of return on investments is 18%.
Should the firm carry out the proposal? (Answer: No)
6. A firm has credit sales amounting to Rs.32,00,000. The sales price per unit is Rs.40; the
variable cost is Rs.25 per unit while the average cost per unit is Rs. 32. The average age of
accounts receivables of the firm is 72 days. The firm is planning to tighten credit standards. It
will result in a fall in the sales volume to Rs.28,00,000 and the average age of accounts
receivables to 45 days. Assume a 20% return on investments. Is the proposal under
consideration feasible? (Answer: No)
7. A firm is examining the question of relaxing its credit policy. It sells at present 20,000 units at
a price of Rs. 100 per unit; the variable cost per unit is Rs. 88 and the average cost per unit is
Rs.92. All the sales are on credit, the average collection period being 36 days. A relaxed policy
is expected to increase sales by 10% and the average age of receivables to 60 days. Assuming
15% return, should the firm relax its credit policy? (Answer: Yes)
Compiled by N. Chidambaram, Faculty/MBA, SNSCE
Page : 2