Following are the details regarding operations of XYZ Company Ltd. during a period of last 12 months: Sales ₹12,00,000 Selling Price per unit ₹10 Variable cost per unit ₹7 Total cost per unit ₹9 Credit period allowed to

Present cost of Sales (₹12,00,000 / ₹10) = (1,20,000 units x ₹9) = ₹10,80,000 Cost of additional Sales (30,000 units x ₹7 (Variable Cost only)) = ₹2,10,000 Total Cost of Sales = ₹12,90,000 New Average cost per unit = ₹12,90,000 / 1,50,000 units = ₹8.60 New Average collection period = 2 months Amount invested in receivables = ₹12,90,000 / 12 x 2 = ₹2,15,000 Amount invested in number of units in receivables under existing policy = 1,20,000 / 12 x 1 month = 10,000 units Investment in receivables = 10,000 units x ₹9 = ₹90,000 Additional investment in receivables = New Investment - Old Investment = ₹2,15,000 - ₹90,000 = ₹1,25,000 Profitability of additional sales = Additional units sold x Contribution per unit = 30,000 x ₹3 = ₹90,000 Return on additional Investment in receivables = (₹90,000 / ₹1,25,000) x 100 = 72% The required rate of return of the firm is only 30% while the actual return on additional investment in receivables comes to 72% on adoption of new policy. Therefore, the firm should adopt the new credit policy.