BG Co.'s present annual sales amount to ₹ 36 lakhs at ₹ 12 per unit. Variable cost are ₹ 6 per unit and fixed cost amount to ₹ 2.50 lakhs per annum. Company presently offers credit period of one month to its customers. I

Statement showing effect of various credit policies Present policy (1 month credit) Alternative-1 (2 months credit) Alternative - 2 (3 months credit) A. Sales (i) Present sales (in units) 3,00,000 3,00,000 3,00,000 Increase in sales (in units) - 30,000 75,000 Total (in units) 3,00,000 3,30,000 3,75,000 (ii) Sales @ ₹12/ unit (in ₹) 36,00,000 39,60,000 45,00,000 B. Variable cost @ ₹ 6 per unit 18,00,000 19,80,000 22,50,000 Gross margin (in ₹) 18,00,000 19,80,000 22,50,000 C. Fixed cost (in ₹) 2,50,000 2,50,000 3,50,000 D. Net margin 15,50,000 17,30,000 19,00,000 E. Invested in receivables (in ₹) (variable cost + fixed cost) * no. of months' credit/12 1,70,833 3,71,667 6,50,000 F. Expected return @ 20% receivables (in Rs.) 34,167 74,333 1,30,000 G. Bad debt to sales (in ₹) 36,000 79,200 2,25,000 H. Net profit (D-F-G) (in ₹) 14,79,833 15,76,467 15,45,000 Decision: Credit policy of 2 months gives maximum profit. Hence, this is most rewarding credit policy for the company.