Question 5 OR (b)
Cash discount policy: 2/10 net 60
10 marks
- Time to write
- About 20 minutes
From an older CBCS paper
Question
Question 5 OR (b) · 10 marksA firm's annual credit sales are Rs. 1800000. It grants its customer 2 months credit, with no cash discount facility. It now intends to offer a discount of '2/10 net 60'. This is expected to reduce the average collection period to one month, with 50% of the customers (in value) taking advantage of this benefit. The unit selling price is Rs. 10, while the average cost per unit is Rs. 8.6. You are required to advice the firm on this new scheme, presuming a required return on investment of 25% and that one month is of 30 days.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- adviceEnd with a one-line decision that follows from your figures.
What the paper leaves open
"To advice the firm" is kept as printed. The answer values the investment in debtors at cost.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Total cost and the cost basis 2 marks 4 min
- 2 Investment in debtors, present and proposed 3 marks 5 min
- 3 Return on funds released and cost of discount 3 marks 5 min
- 4 Net gain and advice 2 marks 4 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Short on time? End with step 4's one-line decision, whatever happens: never leave the figures without it.
Try it first. About 20 minutes for 10 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Principle. A cash discount speeds up collection and releases funds that can be used elsewhere, but it costs money; it should be allowed only if its cost is less than the earnings on the funds released. The investment in debtors is measured at cost: total cost × credit period ÷ 360.
Units sold = 18,00,000 ÷ ₹10 = 1,80,000; total cost = 1,80,000 × ₹8.6 = ₹15,48,000. One month = 30 days.
| Particulars | Present (2 months) | Proposed (1 month) |
|---|---|---|
| Total cost of credit sales | 15,48,000 | 15,48,000 |
| Average collection period (days) | 60 | 30 |
| Investment in debtors at cost (cost × days ÷ 360) | 2,58,000 | 1,29,000 |
| Particulars | ₹ |
|---|---|
| Funds released (2,58,000 − 1,29,000) | 1,29,000 |
| Return on the funds released @ 25% | 32,250 |
| Less: cost of cash discount (2% × 50% × 18,00,000) | 18,000 |
| Net gain from the scheme | 14,250 |
Advice. The 25% return on the ₹1,29,000 released (₹32,250) exceeds the ₹18,000 cost of the discount, so the firm gains ₹14,250 a year: it should adopt the 2/10 net 60 scheme. (Sales are taken as unchanged, since nothing is said about the discount attracting new sales.)
Where the 10 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Total cost and the cost basis | 2 |
| 2 | Investment in debtors, present and proposed | 3 |
| 3 | Return on funds released and cost of discount | 3 |
| 4 | Net gain and advice | 2 |
| Total | 10 |
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