A group of new customers with 10% risk of non-payment, desires to establish business connection with you. The group desires one and a half months credit and is likely to increase the sales of your concern by ₹1,20,000 pe

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2015
A group of new customers with 10% risk of non-payment, desires to establish business connection with you. The group desires one and a half months credit and is likely to increase the sales of your concern by ₹1,20,000 per annum. Cost of sales would be 80% of sales. Tax rate is 30% and required rate of return is 40% (after tax). Should the new business connection be established? Give your decision with supporting calculations.

Answer & Explanation:

Credit period = 1.5 months ₹ Increase in Sales 1,20,000 Less: Cost of goods sold (96,000) Gross profit 24,000 Less: Bad debts (1,20,000 * 10%) (12,000) Profit before tax 12,000 Less: Tax @ 30% (3,600) Profit after tax 8,400 Required return 40% of ₹12,000 4,800 As the return is more than ₹4,800, the new business connection is acceptable.

Topics: Working Capital Management

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