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    Case Study (6-13) Chapter 6 - Accounts Receivable Managament

    Uploaded by

    Hayati Ahmad
    The document discusses a case study of Jutawan Corporation considering relaxing its credit policy. Currently, the company has annual credit sales of RM7 million with a 30 day average collection period. The proposed change would extend credit terms to 90 days and extend credit to riskier customers. This is expected to increase annual sales by RM8 million. The summary calculates that the expected increase in profit from additional sales would be RM1,040,000. It also calculates that the additional investment required in accounts receivable and inventory would cost RM482,500. Since the net change in pre-tax profits is positive at RM557,500, it recommends that the firm adopt the new, more relaxed credit policy.

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    Case Study (6-13) Chapter 6 - Accounts Receivable Managament

    Uploaded by

    Hayati Ahmad
    250 views2 pages
    The document discusses a case study of Jutawan Corporation considering relaxing its credit policy. Currently, the company has annual credit sales of RM7 million with a 30 day average collection period. The proposed change would extend credit terms to 90 days and extend credit to riskier customers. This is expected to increase annual sales by RM8 million. The summary calculates that the expected increase in profit from additional sales would be RM1,040,000. It also calculates that the additional investment required in accounts receivable and inventory would cost RM482,500. Since the net change in pre-tax profits is positive at RM557,500, it recommends that the firm adopt the new, more relaxed credit policy.

    Original Description:

    Business Finance (Account Receivable)

    Original Title

    Case Study

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    The document discusses a case study of Jutawan Corporation considering relaxing its credit policy. Currently, the company has annual credit sales of RM7 million with a 30 day average collection period. The proposed change would extend credit terms to 90 days and extend credit to riskier customers. This is expected to increase annual sales by RM8 million. The summary calculates that the expected increase in profit from additional sales would be RM1,040,000. It also calculates that the additional investment required in accounts receivable and inventory would cost RM482,500. Since the net change in pre-tax profits is positive at RM557,500, it recommends that the firm adopt the new, more relaxed credit policy.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    250 views2 pages

    Case Study (6-13) Chapter 6 - Accounts Receivable Managament

    Uploaded by

    Hayati Ahmad
    The document discusses a case study of Jutawan Corporation considering relaxing its credit policy. Currently, the company has annual credit sales of RM7 million with a 30 day average collection period. The proposed change would extend credit terms to 90 days and extend credit to riskier customers. This is expected to increase annual sales by RM8 million. The summary calculates that the expected increase in profit from additional sales would be RM1,040,000. It also calculates that the additional investment required in accounts receivable and inventory would cost RM482,500. Since the net change in pre-tax profits is positive at RM557,500, it recommends that the firm adopt the new, more relaxed credit policy.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Case Study (6-13) Chapter 6 Accounts Receivable Managament

    Jutawan Corporation is considering relaxing its current credit policy. Currently, the firm has
    annual credit sales of RM7 million and an average collection period of 30 days. Under the
    proposed change the credit term, would be changed from net 30 to net 90 and credit would be
    extended to a riskier class of customer. It is assumed that bad debt losses on current customers
    will remain at their current level. Under this change, it is expected that sales will increase by
    RM8 million. Assume that the firm works 360 days a year. Given the following information,
    should the firm adopt the new policy?
    New sales level
    Original sales level
    Contribution margin
    % bad debt losses on additional sales
    New average collection period
    Original average collection period
    Additional investment in inventory
    Pre-tax required rate of return
    New Cash Discount

    RM15 Million
    RM7 Million
    20%
    7%
    90 days
    30 days
    RM50,000
    15%
    0%

    Solution:
    Step 1: Estimate the change in profit
    Y= (

    S x CM) (

    BD)

    = [(15,000,000 7,000,000 x 0.2) ( 8,000,000.00 x 7%)]


    = 1,600,000 560,000
    = RM 1,040,000
    Step 2: Estimate the cost of additional investment in accounts receivable and inventory
    i) Additional accounts receivable =
    [(New Sales Level)(New Average Collection)] [(Original Sales Level)(Original Average Collection)]
    360
    Period
    360
    Period
    =[(15,000,000)(90)] [(7,000,000)(30)]
    360
    360
    = 3,750,000 583,333.33
    = RM 3,166,666.67

    ii) Additional Inventory = RM50,000.00


    iii) Pre-tax required rate of return = 15%
    iv) Cost of Additional investment in accounts receivable and inventory =
    (Additional accounts receivables + additional inventory) x (pre-tax required rate of return)
    = ( RM3,166,666.67 + RM50,000) x 15%
    = RM482,500
    Step 3: Estimate the change in cost of the cash discount (if a change in the cash discount is
    enacted)
    Cash Discount = 0%
    Step 4: Compare the incremental revenues with the incremental cost
    Net change in pre-tax profits = Step 1 (Step 2 + Step 3)
    Net change in pre-tax profits = RM1,040,000 (RM482,500 + 0)
    = RM557,500
    Conclusion:
    Since the net change in pre-tax profits is of positive value, it is reasonable for the firm to adopt
    the new policy.

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