Alliance Ltd. having annual sales of ₹80 lakh extends 30 days credit period to its debtors. The variable cost is estimated at 80% on sales and fixed costs are ₹8 lakh. The company intends to change the credit policy for

Evaluation of Proposed credit policies Amount in Lakh ₹ Credit policy Present A B C Period (days) 30 45 60 75 Annual sales 80 86 90 92 Variable cost (80% on sales) 64 68.8 72 73.6 Fixed cost 8 8 8 8 Total cost 72 76.8 80 81.6 Profit (annual sales- total cost) 8 9.2 10 10.4 Incremental profit (A) 1.2 2 2.4 Average Investment in Debtors 72*30/365 = 5.92 76.8*45/365 = 9.47 80*60/365 = 13.15 81.6*75/365 = 16.77 Incremental investment in debtors as compared to present level 3.55 7.23 10.85 20% of Incremental investment (B) 0.71 1.45 2.17 Excess return i.e. (A-B) 0.49 0.55 0.23 Policy B having average collection period of 60 days yields the maximum profit and thus is most profitable.