Daud Tools, a manufacturer of lathe tools, is currently selling a product for $10 per unit. Sales (all on credit) for last year were 60,000 units. The variable cost per unit is $6. The firm’s total fixed costs are $120,000. The firm is currently contemplating a relaxation of credit standards that is expected to result in the following; a 5% increase in unit sales to 63,000 units; an increase in average collection period from 30 days (the current level) to 45 days; an increase in bad debt expenses from 1% of sales (current level) to 2%. The firm determines that its cost of tying up funds in receivables is 15% before taxes. Question: Determine whether it would be profitable for Daud Tools to relax its credit standards. To arrive at your decision, show the calculation of

Daud Tools, a manufacturer of lathe tools, is currently selling a product for $10 per unit. Sales (all on credit) for last year were 60,000 units. The variable cost per unit is $6. The firm’s total fixed costs are $120,000. The firm is currently contemplating a relaxation of credit standards that is expected to result in the following; a 5% increase in unit sales to 63,000 units; an increase in average collection period from 30 days (the current level) to 45 days; an increase in bad debt expenses from 1% of sales (current level) to 2%. The firm determines that its cost of tying up funds in receivables is 15% before taxes. Question: Determine whether it would be profitable for Daud Tools to relax its credit standards. To arrive at your decision, show the calculation of

(a) Additional profit contribution from sales
(b) Cost of marginal investment in account receivables
(c) Cost of marginal investment in bad debts

CSS Solved Business Administration Past Paper 2018 | Daud Tools, a manufacturer of lathe tools, is currently selling a product for $10 per unit. Sales (all on credit) for last year were 60,000 units. The variable cost per unit is $6. The firm’s total fixed costs are $120,000. The firm is currently contemplating a relaxation of credit standards that is expected to result in the following; a 5% increase in unit sales to 63,000 units; an increase in average collection period from 30 days (the current level) to 45 days; an increase in bad debt expenses from 1% of sales (current level) to 2%. The firm determines that its cost of tying up funds in receivables is 15% before taxes. Question: Determine whether it would be profitable for Daud Tools to relax its credit standards. To arrive at your decision, show the calculation of

The following question is attempted by Miss Nimra Masood, the top scorer in CSS Business Administration papers. Moreover, the answer is written on the same pattern, taught by Sir to his students, scoring the highest marks in compulsory subjects for years. This solved past paper question is uploaded to help aspirants understand how to crack a topic or question, how to write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.

Topic Breakdown

Finance is one of the pillars of business administration; therefore, the CSS examiner gives two questions from this portion every year. A clear understanding of finance not only assists in this paper but also in Accounting and Auditing.
Subject: Finance
Chapter: Variance Analysis

Data Available:

Actual Sales = 60000 units @ $10 per unit

Variable Cost = 60000 units @ $6 Per unit

Fixed Costs = $ 120000

Change after relaxation in credit standard:

Change in units sold = 63000 units

Increase in Avg. Collection period from 30 to 45 days

Increase in bad debts= from 1% to 2% of sales

Cost of tying up funds in receivable  = 15% before tax

Additional Profit Contribution from Sales:

  • Formula:

 Sales = units sold * price per unit

Old Sales = 60000 * 10 = $600000

New Sales= 63000 * 10 = $630000

Change of sales = new profit – old profit = 630000 – 600000= $30000

 Actual ProfitProfit with Credit Relaxation
Sales60000 * 10 = 60000063000 * 10 = 630000
Fixed Cost             (120000)                    (120000)
Variable Cost60000 * 6 =  (360000)63000 * 6 =  (378000)
Operating Profit                    120000                    132000

Additional profit contribution from sales = 132000 – 12000 = $12000

Cost of marginal investment in Accounts Receivable:

Cost before Credit Relaxation= 120000 * 0.15 = 18000

Cost after Credit Relaxation = 132000 * 0.15 = 19800

Cost of marginal investment in Accounts Receivable = 1800

Cost of Marginal investment in bad debts:

Accounts receivable = all sales are credit

Cost of bad debts before credit relaxation = a/c receivables * 1%

                                                                  = 600000 * 0.01 = 6000

Cost of bad debts after credit relaxation = 630000 * 0.02 = 12600

Cost of marginal investment in bad debts = 12600 – 6000 = 6600

Net additional profit earned after credit relaxation = profit contribution from sales – cost of investment in A/C receivable – Cost of Bad debts

                            = 12000 – 1800 – 6600 = $3600

Decision

From the above financial analysis it is determined that the revenues after credit relaxation surpass the costs of credit relaxation; hence, it is feasible for Daud tools to relax its credit standards

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