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(^230) Financial Management
The analysis here would be similar to the one done for the credit period. Gross sales
volume under either the present credit terms or plan C or D remain at Rs 36 crore.
Sales for which discounts are taken are 50 per cent or Rs 18 crore for the present plan,
and Rs 25.2 crore and Rs 32.4 crore for plan C and D, respectively (see Table 2). The
credit discount for the present plan is 2 per cent or 0.02 ◊ Rs 18 crore = Rs 360.000.
For plan C it is 0.025 ◊ Rs 25.2 crore = Rs 630,000 and is Rs 972,000 for plan D. The
incremental cost of going to a more liberal credit discount under plan C is Rs 630,000 -
Rs 360,000 = Rs 270,000 and is Rs 612,000 for plan D.
The increase in credit costs due to giving a larger credit discount reduces the level of
investments in accounts receivable. Total receivables under the present plan were
calculated to be Rs 2 crore in Table 1. Under plan C the average collection period is 0.7
(10 days) + 0.3 (30 days) = 16 days. Since daily sales are Rs 100,000, total receivables
are Rs 1.6 crore. Under plan D total receivables are [0.9 (10 days)] ◊ Rs 100,000 = Rs
1.2 crore. Under plan C, receivables decrease by Rs 2.0 crore - Rs 1.6 crore = Rs
400,000. The decrease in investments under plan D is Rs 2.0 crore - Rs 1.2 crore = Rs
800,000.
The cost of investments in receivables is 12 per cent. Cost savings are Rs 400,000 ◊
0.12 = Rs 48,000 for plan C and Rs 96,000 for plan D. Cost savings less increase in
discount costs give increase in profits before taxes. As Table 2 shows, neither plan C
nor plan D results in increasing profits over the present levels. Consequently, Mitsui
should not implement either plan C or plan D.
Table 2: Analysis of Credit Terms Changing Credit Discounts for the Mitsui Corporation.
a Before credit related costs and taxes.
(^1) Sales are assumed to be reasonably equally distributed among buyers. Also, it is assumed that the daily sales
volume is constant.
Present Plan C Plan D
(d) Gross sales volume Rs 36,000,000 Rs 36,000,000 Rs 36,000,000
(e) Sales with discounts (%) 50% 70% 90%
(f) Sales with discounts (Rs = 1 × 2) Rs 18,000,000 Rs 25,200,000 Rs 32,400,000
(g) Credit discounts (%) 2% 2.5% 3.0%
(h) Credit discounts (Rs = 3 × 4) Rs 360,000 Rs 630,000 Rs 972,000
(i) Increase in discounts 0 Rs 270,000 Rs 612,000
(j) Total receivables Rs 2,000,000 Rs 1,600,000 Rs 1,200,000
(k) Decrease in receivables 0 Rs 400,000 Rs 800,000
(l) Decrease in investment costs (8 ×
12 %)
0 Rs 48,000 Rs 96,000
(m) Increase in profits (9–6) 0 (Rs 222,000) (Rs 516,000)