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Activity 3 AF

El Periquito SA de CV is considering relaxing credit standards to increase sales from 62,000 to 65,720 units, which would raise bad debt expenses and the average collection period. The analysis shows that while the marginal investment in accounts receivable and bad debts will increase, the proposed plan is still beneficial as it leads to higher profits despite the risks. Ultimately, the company concludes that the potential profit gain outweighs the costs associated with increased bad debts.

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7 views4 pages

Activity 3 AF

El Periquito SA de CV is considering relaxing credit standards to increase sales from 62,000 to 65,720 units, which would raise bad debt expenses and the average collection period. The analysis shows that while the marginal investment in accounts receivable and bad debts will increase, the proposed plan is still beneficial as it leads to higher profits despite the risks. Ultimately, the company concludes that the potential profit gain outweighs the costs associated with increased bad debts.

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© © All Rights Reserved
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ACTIVITY 3

Practical case accounts receivable


FINANCIAL MANAGEMENT
INTERNATIONAL TRADE
NELLY MARTÍNEZ ROCHA
EMILY SÁNCHEZ
UANE
El Periquito SA de CV, a manufacturer of hammers, currently sells a product for $12.
unit. Last year's sales (all on credit) were 62,000 units. The variable cost
The cost per unit is $8. The total fixed costs of the company are $140,000. The company considers
a relaxation of credit standards that is expected to result in the following: a
a 6% increase in unit sales to reach 65,720 units; an increase in the period
average collection period from 30 days (the current level) to 45 days; an increase in accounts expenses
bad debts from 2% of sales (the current level) to 3%. The company determines that its cost for the
The immobilization of funds in accounts receivable is 15% before taxes. To determine if
It is advisable to relax your credit standards, Periquito SA de CV.

THE EFFECT OF RELAXATION ON THE ADDITIONAL CONTRIBUTION OF SALES OF THE


COMPANY TO PROFITS

Contribution to the unit profit = $12 - $8 = $4

The total additional contribution of sales to profits = 62,000 units * $4 = 248,000

THE COST OF MARGINAL INVESTMENT IN ACCOUNTS RECEIVABLE


AVERAGE INVESTMENT IN ACCOUNTS RECEIVABLE = 8/12.2 = 0.65

Total variable cost of annual sales =

Actual plan == $8*62,000 units = 496,000

Proposed plan == $8 * 65,720 units = 525,760

ACCOUNTS RECEIVABLE TURNOVER


Plan actual equals 365 divided by 30 equals 12.2

Proposed plan == 365/45 = 8.1

AVERAGE INVESTMENT IN ACCOUNTS RECEIVABLE

Actual plan == 496,000 / 12.2 = 40,655

Proposed plan == 525,760/8.1 = 64,908

COST OF MARGINAL INVESTMENT IN ACCOUNTS RECEIVABLE

PLAN PROPOSED 64,908


PLAN_ACTUAL - 40,655
MARGINAL INVESTMENT IN ACCOUNTS RECEIVABLE 24,253
COST OF FIXED ASSETS X 0.15
MARGINAL INVESTMENT COST IN ACCOUNTS RECEIVABLE 3,638
AND THE COST OF MARGINAL BAD DEBTS.

PROPOSED PLAN=(0.03*$12 X 65,720) 23,659


CURRENT PLAN= (0.02*$12 X 62,000) -14,880
COST OF MARGINAL BAD DEBTS 6,000
CONCLUSION

At the end of the work done, I observed that the costs of debts
Uncollectible amounts are calculated considering the selling price per unit.
($12) to deduct not only the true loss of the variable cost ($8)
What happens when a customer does not fulfill the payment of their account?
but also the contribution to profits per unit (in this case
$4) which is included in the “additional contribution of sales to the
utilities. Therefore, the resulting cost of bad debts
marginal is $6,000. In conclusion, the plan is more beneficial for you.
proposed, since in case the utility is lost along with
with the investment cost, at the time of raising the budget,
you will gain much more profit, then, you will not lose a lot of quantity,
rather, it will not take such risks when the cost of
marginal debts are complete.

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