Question

X Ltd. wishes to increase its credit period from "net 35" to "net 50". It expects
sales to increase from Rs.120 lakhs to Rs. 180 lakhs and the average collection period to increase
from 35 days to 50 days. The bad-debt loss ratio and collection costs ratio will remain at 5% and 6%
respectively. The company's variable costs ratio is 85%, tax rate is 50% and the after tax required
rate of return is 20%. Advise X Ltd based on (i) Variable cost valuation (ii) Sales value valuation.​

Answer 1

Answer:

X Ltd. wishes to increase its credit period from "net 35" to "net 50". It expects

sales to increase from Rs.120 lakhs to Rs. 180 lakhs and the average collection period to increase

from 35 days to 50 days. The bad-debt loss ratio and collection costs ratio will remain at 5% and 6%

respectively. The company's variable costs ratio is 85%, tax rate is 50% and the after tax required

rate of return is 20%. Advise X Ltd based on (i) Variable cost valuation (ii) Sales value valuation.