A company, whose current sales are ₹15,00,000 per annum and average collection period is 30 days, wants to pursue a more liberal credit policy to improve the sales. The following data are available: Credit (period) polic

Evaluation of different credit policies Particulars Present policy Policy A Policy B Policy C Policy D Policy E Credit period (days) 30 45 60 75 90 120 No. of units @ ₹5 3,00,000 3,12,000 3,18,000 3,30,000 3,36,000 3,40,000 Sales 15,00,000 15,60,000 15,90,000 16,50,000 16,80,000 17,00,000 Variable cost @ ₹2.75 per unit 8,25,000 8,58,000 8,74,500 9,07,500 9,24,000 9,35,000 Fixed cost 3,75,000 3,75,000 3,75,000 3,75,000 3,75,000 3,75,000 Total cost 12,00,000 12,33,000 12,49,500 12,82,500 12,99,000 13,10,000 Profit (A) 3,00,000 3,27,000 3,40,500 3,67,500 3,81,000 3,90,000 Average debtors (at cost) W.N. 1 1,00,000 1,54,125 2,08,250 2,67,188 3,24,750 4,36,667 Cost of investment @ 20% (B) 20,000 30,825 41,650 53,438 64,950 87,333 Net profit (A - B) 2,80,000 2,96,175 2,98,850 3,14,062 3,16,050 3,02,667 Working Note (W.N.) 1. Average Debtors (at cost) has been estimated as follows: (Cost/360) x credit period Recommendation: It is evident from the above calculations that the credit policy 'D' with credit period of 90 days is expected to increase the profit to ₹3,16,050. Therefore it may be adopted.