Free of Cost ISBN : 978-93-5034-817-8 Solved Scanner Appendix Scanner IPCC Gr. I November - 2013 Paper - 3 : Cost Accounting and Financial Management Part A (Cost Accounting) Chapter - 2 : Material Cost 2013 - Nov [1] (a) (i) Economic order quantity of material Rex. EOQ = EOQ = (ii) EOQ = 8,000 units Reorder level Reorder level = Safety stock + Lead time consumption Reorder level = 600 + (iii) Reorder level = 600 + 2,000 Reorder level = 2,600 units Maximum stock level = Reorder level + Economic order quantity - (Min. usage Min. Lead time) = 2,600 + 8,000 - lead time consumption (iv) = 8,600 units Average level Average level = = Average level = 4,600 units 1
Solved Scanner Appendix IPCC Gr. I Paper - 3 2 Chapter - 3 : Employee Cost 2013 - Nov [3] (a) 1. Separation Method = = = = 5% So, L = = 800 2. Replacement Method = = = = 8% So, R = 800 8% = 64 3. Flux Method = = = 13% on solving N = 0 Let the No. of workers at the Beginning be X and at the end be Y. = 800 Y+X = 1,600 (1) Accessions = No. of workers at the end + No. of separation ( ) No. of workers at the beginning So, Accessions = R + N = 64 = Y + 40 - X Y + 40 - X = 64. Y - X = 24 (2) on solving the above equations, we get X = 788, Y = 812. (i) Average number of workers on roll = 800 (ii) Number of workers replaced during the year = 64 (iii) Number of new accessions = 0 (iv) Number of workers at the beginning of the year = 788. Chapter - 4 : Overheads 2013 - Nov [6] (a) Assumptions (a) Assumed that maintenance and set up are included in the total working hours of 3,000 hours. (b) Maintenance hours of 400 hours is p.a. (c) Maintenance and set up time is not productive (d) Power cost is incurred only for effective hours. Effective hours p.a. = 3,000-8% - 400 = 2,360 hours. Particulars Computation ` Depreciation (25,00,000-1,25,000) 2,85,000 Repairs & Maint. 26,000
Solved Scanner Appendix IPCC Gr. I Paper - 3 3 Power 2,360 hrs. 25u ` 5 p.u. 2,95,000 Chemicals 2,600 p.m. 12 m. 31,200 Overheads 18,000 p.m. 12 m. 2,16,000 Insurance 25,00,000 2% 50,000 Operator s Salary (18,500 p.m. 12 m 2 persons) 1,11,000 Machine hour rate = = ` 429.75 per machine hours. Total OH 10,14,200 Chapter - 5 : Integrated & Non-Integrated Accounts 2013 - Nov [1] (b) Journal Entries under Integrated System of Accounting Particulars L.F. Dr. Cr. (i) Work in Progress Control A/c Dr. 3,25,000 Factory overheads control A/c Dr. 1,15,000 To Raw Material control A/c 4,40,000 (Being raw materials issued for direct and indirect purposes) (ii) Work in Progress Control A/c Dr. 4,87,500 (75% of 6,50,000) Factory overheads control A/c Dr. 1,62,500 (25% of 6,50,000) To wages control A/c 6,50,000 (Being direct & indirect wages allocated) (iii) Factory overheads control A/c Dr. 2,50,000 To Costing Profit & Loss A/c 2,50,000 (Being over absorbed POH Transferred to P/L) Costing Profit & Loss A/c Dr. 1,75,000 To Administration Overhead Control A/c 1,75,000 (Being AOH under absorbed, transferred to P&L) (iv) Sundry Creditors A/c Dr. 1,50,000 To Bank A/c 1,50,000 (Being payment made to sundry creditors) (v) Bank A/c Dr. 2,00,000 To Sundry Debtors A/c 2,00,000 (Being collections received from sundry debtors)
Solved Scanner Appendix IPCC Gr. I Paper - 3 4 Chapter - 8 : Contract Costing 2013 - Nov [7] (e) (ii) Escalation clause is a stipulation in the contract that the contract price will be increased by an agreed amount or percentage if the price of raw material, wages etc. rises beyond a certain limit. The object of this clause is to safeguard the interest of both side against unfavourable change in price. While due to loss of the contractors interest is safeguarded as has profit percentage not reduced. The customer's interest is safeguard as quality is ensured because due to the escalation, clause the contractor does not use materials of low quality. Accounting Treatment Step I : The increased contract price is determined with reference to the escalation clause. Step II : The amount due from the customer is recorded in contract A/c by passing the following general entry. Customer's A/c Dr. To Contract A/c Chapter - 9 : Operating Costing 2013 - Nov [2] (a) Statement of Operating Costs & Revenues per month Particulars Computation ` Standing Charge Deprecation Insurance Manager cum 9333.33 18,00,000 3% 4,500 Accountants Salary given 8,000 Road tax 50,000 4166.67 Garage rent given 2,500 Total standing Charge 28,500 Maintenance Charge Repairs & Maintenance Running Cost Drivers salary given 15,000 Conductors salary given 12,000 Stationery given 500 12,500 12,500
Solved Scanner Appendix IPCC Gr. I Paper - 3 5 Engine oil, lubricants Diesel oil = ` 2,500 6,250 = ` 52 15,600 49,350 Total operating cost (excluding commission) (85% - 10% - 75%) 90,350 Add: commission (10% on collection) 12,047 Total cost 1,02,397 Add: Profit.15% 18,070 Total takings 100% 1,20,467 Working Note: No. of passengers = 40 (given) No. of kms. per month = 1 Bus 3 Trips 2 ways 20 kms. 25 days = 3,000 kms. p.m. Passenger kms. p.m. = 40 3,000 = 1,20,000. It is given that profit = 15% of takings & Commission = 10% of takings. Hence, Total Operating Costs = 100% - 15% - 10% = 75% of total taking. Total Takings = = 1,20,467. Now, Commission & Profits are taken at 10% & 15% respectively on total takings. Fare per Passenger Km. = = ` 1.00 Chapter - 10 : Process Costing 2013 - Nov [5] (a) (i) Equivalent Production The presence of opening or closing WIP poses an accounting problem as to the evaluation of inventory as well as ascertainment of cost per unit of output. To solve this problem, the WIP or incomplete units are expressed in terms of complete units, which are termed as equivalent unit of production. Thus, equivalent production refers to a systematic procedure of expressing the output of a process in terms of completed units. It is, therefore, the conversion of uncompleted production into its equivalent completed units.
Solved Scanner Appendix IPCC Gr. I Paper - 3 6 (ii) Equivalent units of production means converting the uncompleted production into its equivalent completed units. To compute the equivalent units, in each process, an estimate is made of the percentage completion of the closing WIP. The WIP is inspected and an estimate is made of the degree of completion, usually on a percentage basis. Then the equivalent units of WIP can be computed by the following formula: Equivalent units of production. = Actual no. of units in WIP Percentage of work completed. E.g. If the units in WIP be 200 and 60% work is completed then Equivalent Units = 200 60% = 120 units. Inter Process Profit We know that in processing units the output for one process becomes the input for the next process. The price at which the output of one process is transferred to another. In some processing units the output from one process is transferred at cost plus a percentage for profit. This profit (transfer price-cost) is called inter process profit. Thus, inter-process profit is the profit made by the transfer of output from one process to another. Inter-process profit facilitates to evaluate the performance of each process, from the cost effectiveness point of view and also from the profit point of view. However, it poses a problem especially for the valuation of closing WIP. This is because, for financial statement purpose closing WIP should be valued at cost or market value whichever is lower. Where as under this system, WIP should be valued at cost plus profit.
Solved Scanner Appendix IPCC Gr. I Paper - 3 7 Chapter - 12 : Standard Costing 2013 - Nov [4] (a) (i) Material Usage Variance = Standard price (Standard quantity - Actual quantity) = ` 45 (9,000-8,900) = ` 4,500 (F) (ii) Material Price Variance = Actual quantity (Standard price - Actual price) = 8,900 (45-46) = 8,900 (A) (iii) Material Cost Variance = Standard cost - Actual cost = (9,000 45) - (8,900 46) = 4,05,000-4,09,400 = 4,400 (A) (iv) Labour Efficiency Variance = Standard rate (standard hours for actual output - actual hours) 50 (9,000-7,000 (v) (vi) (vii) = 10,000 (F) Labour Rate Variance = Actual time (std rate - actual rate) = 7,000 (50-52) = 14,000 (A) Labour Cost Variance = Labour efficiency variance + Labour rate variance = 10,000 + (- 14,000) = 4,000 (A) Variable Overhead Cost Variance = (Standard hours Standard rate) - Absorbed variable overhead. = - 72,500 = 500 (A) (viii) Fixed Overhead Cost Variance = (actual output std hours) - Absorbed variable OH = - 1,92,000 = 12,000 (A) Chapter - 13 : Marginal Costing 2013 - Nov [5] (b) Practical Application of Marginal Costing Marginal costing is a useful technique of decision making, used by the management of most of the manufacturing concerns. Some of the important decision making areas where marginal costing technique is used by these concerns are :
Solved Scanner Appendix IPCC Gr. I Paper - 3 8 1. Fixation of selling price. (i) Under normal circumstances (ii) For special market (export market) or for a special customer (iii) During recession (iv) At marginal cost or below marginal cost. 2. Decision relating to the most profitable product mix (i) Selection of optimal product mix (ii) Substitution of one product with another (iii) Discontinuing or dropping of a product line 3. Decision relating to make or buy 4. Shut down or continue of determination or output level in period of recession of depression. 5. Retaining or replacing a machine 6. Selling in the home or in the export market 7. Change vs. Status quo 8. Expanding or contracting 9. Decision relating to price-mix. 2013 - Nov [7] (a) Just-In Time Purchasing: JIT purchasing is the purchase of materials and supplies in such a manner that delivery immediately preceedes the demand of use. This will ensure that stock are as low as possible or nearly cut to a minimum. Considerable saving in material handling expenses is made by requiring suppliers to inspect materials and guarantee their quality. This improved service is obtained by giving more business to fewer suppliers, who can provide high quality and reliable delivery. Encouragement is given to employees to render good service by placing with them long term purchasing order companies. which implements JIT, purchasing substantially reduces their investments in raw materials & WIP stocks. The features of JIT purchasing which plays important role are : Long term stable relationship with suppliers. Simple purchase agreements Small but frequents deliveries. Advantages of JIT Purchasing: The advantages of JIT Purchasing are : 1. It results in considerable savings in material handling expenses. 2. It results in savings in factory space. 3. Investment in raw materials & WIP is substantially reduced. 4. Last quantity discounts can be obtain & paperwork is reduced because of using of blanket long term orders to fewer suppliers instead of purchase orders. 5. JIT purchasing are now attempting to extend daily deliveries to as many areas as possible so that the goods spend less time in warehouse or on store shelf before they are exhausted.
Solved Scanner Appendix IPCC Gr. I Paper - 3 9 Chapter - 14 : Budgets & Budgetary Control 2013 - Nov [7] (b) Budget preparation, operation, enforcement and control demand a sound and efficient organisation. For budgeting and budgetary control, the following organisation is recommended: 1. Specification of Organisational Objective: Budget presents a view of plan in figures. It is necessary that broad objectives of organisation are specified before this plan is stated. The statement of broad objectives of organisation will involve expressing mission, vision and ethical tone of organisation. This type of specification will lay down a sort of guide for managers to take corrective decisions and independent decisions within the given framework. 2. Establishment of Budget Centres: The budget centre is defined as A section of the organisation of an undertaking defined for the purposes of budgetary control. Budget centre must be clearly defined because a separate budget has to be set for each such centre with the help of the head of the department concerned. 3. Preparation of an Organisational Chart: Organisation chart defines the functions and responsibilities of each member of management and ensures that each one knows his position in the organisation and his relationship to other members. Briefly, this chart shows: (a) Functional responsibility of a particular executive. (b) Delegation of authority to various levels. (c) Relative position of a functional head with heads of other functional departments. 4. Introduction of Adequate Accounting Records: A pre-requisite to the establishment of a budgetary control system is that accounting system should be able to record and analyse the information required. A chart of accounts corresponding with the budget centre should be maintained. 5. Establishment of Budget Committee: In small organisations, one executive may handle work relating to preparation of budget, but in big organisations, a budget committee is formed for this purpose. A budget committee consists of chief executive, budget officer and heads of all budget centres. Often chief executive of an organisation is the head of this committee, so that decisions of this committee may be binding on others. The budget officer acts as a secretary to chairman. The managers of different departments prepare their budgets and submit to this committee. This committee finalises the budgets and prepares the Master Budget. 6. Preparation of Budget Manual: For proper operation of budgetary control, a budget manual is prepared setting out responsibilities of executives involved in the routine of introduction of budgetary control. A budget manual is a document which defines the responsibilities of persons engaged in a budgetary programme and sets out the routine, the forms and records required under budgeting. Budget manuals specify the procedures to be followed in developing the budget, and reports of the budget information and actual operating data to be used. Since organisations differ in terms of structure, method of production, and operating requirements, it is difficult to prepare a budget manual suitable for use in all business enterprises.
Solved Scanner Appendix IPCC Gr. I Paper - 3 10 7. Fixation of Budget Period: The budget period is an important factor in developing a comprehensive budgeting programme. CIMA defines budget period is the period for which a budget is prepared and used, which may then be sub-divided into control periods. Budget periods vary between short-term and no specific period can be laid down for budgets. It varies among concerns and industries as a result of several factors. An important point to note is that short-term budgets will be much more detailed and are costly to prepare and operate, while long-term budgeting is considerably affected by unforeseen conditions. 8. Determination of Key Factor: Key factor means the factor which limits the size of output. It is also known as limiting, or governing, or principal budget factor. It is defined as the factor, the extent of whose influence must first be assessed in order to ensure that functional budgets are capable of fulfilment. It is essential to locate the key factor before the preparation of budgets because it influences almost all budgets. Thus, key factor serves as the starting point for the preparation of budgets. Part B (Financial Management) Chapter - 3 : Financial Analysis and Planning 2013 - Nov [2] (b) Balance Sheet of Sona Ltd. as on 31 st March 2013 Particulars as at 31 st March Note Amount I Equity and Liabilities: (1) Shareholders Funds: (a) Share Capital (given) 5,75,000 (b) Reserves and Surplus Note 1 2,60,000 (2) Current Liabilities: (a) Trade Payables - Creditors Note 2 1,00,000 (b) Other current liabilities - Bank Credit Note 2 2,00,000 Total 11,35,000 II Assets: (1) Non-Current Assets: Fixed Assets (Bal. Fig.) 6,85,000 (2) Current Assets: (a) Inventories Note 4 2,10,000 (b) Trade receivables - Debtors Note 7 1,75,000 (c) Cash & Cash equivalents - Cash & Bank Note 8 65,000 11,35,000 Working Note: 1. Current ratio = = 1.5 times. Therefore, Current Asset = 1.5 Current Liabilities
Solved Scanner Appendix IPCC Gr. I Paper - 3 11 2. Net working capital = Current Assets - Current Liabilities = 1.5 CL - CL = 1,50,000 = 0.5 CL = 1,50,000 CL = = 3,00,000 Bank Credit & Creditors divided in 2 : 1 ratio, 2,00,000 & 1,00,000. 3. Current Assets = 1.5 Current Liabilities = 1.5 3,00,000 = 4,50,000. 4. Quick ratio = = 0.8 times ˆ = 0.8 So, = 0.8 Stock = ` 2,10,000 5. Inventory Turnover = = = 5 times. So, COGS = 2,10,000 5 = 10,50,000 6. Since Gross Margin is 25%, COGS constitutes 75% of sales. So, Sales = = 14,00,000. 7. Debtors = Sales = 1,75,000. 8. Cash & Bank = Total current assets - stock - debtors = 4,50,000-2,10,000-1,75,000 = 65,000. 9. = 4 times. So, R & S = 65,000 4 = 2,60,000. 2013 - Nov [4] (b) (i) Schedule of changes in Working Capital Particulars 31.03.2012 31.03.2013 Increase Decrease (A) Current Assets: Stock 3,00,000 2,30,000 70,000 Sundry Debtors 1,80,000 2,00,000 20,000 Cash & Bank 66,000 1,52,000 86,000 Total current asset (A) 5,46,000 5,82,000 1,06,000 70,000 (B) Current Liabilities: Sundry Creditor 1,71,000 1,67,000 4,000
Solved Scanner Appendix IPCC Gr. I Paper - 3 12 Bills payable 20,000 30,000 10,000 Total current liability (B) 1,91,000 1,97,000 10,000 4,000 (C) Net working capital (A - B) 3,55,000 3,85,000 96,000 66,000 Adjustment: Increase in WC 30,000 30,000 (ii) Funds Flow statement for the year ended 31 st March 2013. Sources of Funds ` Application of Funds ` Funds from operations 5,13,596 Net increase in net working capital 30,000 Purchase of plant item (W.N.2) 1,90,000 Purchase of long term investment (1,50,000-1,20,000) 30,000 Tax paid (W.N.1) 1,70,000 Dividend paid 93,596 Total 5,13,596 5,13,596 Working Note: 1. Provision for Taxation A/c Particulars ` Particulars ` To Bank (bal. fig.) 1,70,000 By balance b/d 1,60,000 To balance c/d 1,80,000 By P&L A/c (bal. fig.) 1,90,000 2. Plant A/c Particulars ` Particulars ` To balance b/d 3,70,000 By Depreciation 40,000 To Bank (bal. fig.) 1,90,000 By bal. c/d 5,20,000 3. Adjusted P & L A/c Particulars ` Particulars ` To Depreciation (40,000 + 40,000) 80,000 By Funds from operation 5,13,596 To Provision for taxation 1,90,000 To Interim Dividend & Corporate dividend tax (80,000 + 13,596) 93,596 To General reserve (1,80,000-1,40,000) 40,000 To Profit after adj. (2,70,000-1,60,000) 1,10,000 5,13,596 5,13,596 Chapter - 4 : Financing Decisions-Cost of Capital & Capital Structure 2013 - Nov [1] (d) Particulars Plan 1 Plan 2 Description ESC = 4,00,000, ESC = 4,00,000 Debt = 2,00,000 PSC = 2,00,000 EBIT (given) 2,40,000 2,40,000 Less: Int. @ 12% on 2,00,000 24,000
Solved Scanner Appendix IPCC Gr. I Paper - 3 13 EBT 2,16,000 2,40,000 Less: Tax at 30% 64,800 72,000 EAT 1,51,200 1,68,000 Less: Preference dividend Nil X Residual earnings for equity shareholders 1,51,200 1,68,000 X Number of equity shares (4,00,000 10) 40,000 shares 40,000 shares EPS = = 3.78 = 3.78 For indifference between the above alternatives, EPS should be equal. So, = 3.78 = Or 40,000 3.78 = 1,68,000 X Or X = 16,800 So, Rate of Preference Dividend = = 8.4% 2013 - Nov [5] (d) When a firm has consistently been unable to earn the prevailing rate of return on its capital employed, the situation is termed as Over Capitalisation. In simple words it means existence of excess capital as compared to the level of activity and requirement. Parameters 1. When Actual Rate of Earning < Current Rate of Earning. 2. Real Value of Business < Book Value of Business. Causes of Over Capitalisation 1. Under-estimation of the Capitalisation Rate: If the rate of capitalisation is underestimated, it will lead to a situation of over-capitalisation. 2. Over-issue of Capital: Sometimes, while floating a new company, the promoters overestimate the financial requirements, and as a result, they raise more capital than what is actually needed, resulting in over-capitalisation. 3. High Promotion Expenses: Incurring high promotional expenses, excessive preliminary expenses etc. may lead to over-capitalisation. 4. Liberal Dividend Policy: The company might have followed the lenient dividend policy without bothering much about building up the reserves. As a result, the retained profits of the company may be adversely affected. 5. Inadequate Depreciation: Adequate provision might not have been made for depreciation on the assets. As such, the real value of the assets is less than the book value of the assets. 6. Formation of the Company during Inflationary Period: If a company is floated under the conditions of inflation, it requires a large fund for acquiring its necessary assets. But when depression sets in, naturally, the prices of the assets fall which ultimately leads to over-capitalisation.
Solved Scanner Appendix IPCC Gr. I Paper - 3 14 Consequences of Over Capitalisation 1. Poor Creditworthiness: Reduced earnings of an over-capitalised concern affect its creditworthiness and as a result, it becomes difficult for it to get loans or credit at cheaper rates of interest. 2. Difficulties in Obtaining Capital: For a company faced with a situation of overcapitalisation, it is very difficult to obtain further capital for its growth and expansion programmes. It is so because the investors have already lost confidence in the company. 3. Loss of Goodwill: In an over-capitalised company, there is a reduced earning capacity resulting in the fall of market price of its shares and thereby shaking up the investor s confidence. A company whose shares sell below the face value may find it difficult to improve its goodwill in the market. 4. Loss of Market: Over -capitalised companies fail to produce goods at competitive costs and, hence, often lose their market to competitors. 5. Liquidation of Company: An over-capitalised company goes into liquidation unless drastic steps are taken to re-organise the whole capital structure, and re-organisation would itself lead to a lot of problems. 2013 - Nov [7] (d) C Capital Structure refers to the composition of long-term sources of funds, such as debentures, long-term debt, preference share capital and ordinary share capital including reserves and surplus (retained-earning). C It is the permanent financing of the firm, represented by long-term debt, preferred stock and net worth. Thus, capital structure ordinarily implies the proportion of debt and equity in the total capital of a company. Since a company may tap any one or more of the different available sources of funds to meet its total financial requirement. The total capital of a company may, thus, be composed of all such tapped sources. The capital structure should be planned generally keeping in view the interests of the equity shareholders and the financial requirements of a company. An optimum capital structure can be defined as a financial plan having an appropriate debt-equity mix which minimises overall cost of capital of the firm and maximises the market price per share or the total value of the firm. Hence, the optimal capital structure is concerned with the two important variables at one time - the minimization of cost as well as maximization of worth. Chapter - 5 : Business Risk, Financial Risk & Leverage 2013 - Nov [1] (c) Firm N S D Sales 14,87,500 8,71,000 11,76,600 (17,500 85) (6,700 130) (31,800 37) Less: Variable cost 6,65,000 2,84,750 3,81,600 (17,500 38) (6,700 42.5) (31,800 12)
Solved Scanner Appendix IPCC Gr. I Paper - 3 15 Total contribution 8,22,500 5,86,250 7,95,000 Less: Fixed cost 4,00,000 3,50,000 2,50,000 EBIT 4,22,500 2,36,250 5,45,000 Less: Interest on loan 1,25,000 75,000 Nil PBT 2,97,500 1,61,250 5,45,000 Degree of Operating Leverage = Degree of Financial Leverage = = 1.95 = 2.48 = 1.46 = 1.42 = 1.47 = 1 Degree of Combined Leverage = DOL DFL 1.95 1.42 2.48 1.47 1.46 1 = 2.77 = 3.64 = 1.46 Chapter - 6 : Types of Financing 2013 - Nov [7] (e) (i) Main features of Leveraged Lease. 1. A third party lender is involved besides lessor and lessee 2. The lessor borrows a pat of purchase cost from lender (3 party) 3. The asset is held as security. 4. The lender is paid off by lessee from the lease rental. Chapter - 8 : Capital Budgeting and Investment Decisions 2013 - Nov [3] (b) Since project lives are different, the Equivalent Annual Flows Method is adopted. Particulars Machine A Machine B Initial investment 8,00,000 6,00,000 Life 3 years 2 years Cash expenses per annum 1,30,000 2,50,000 Annuity factor at 10% 2.4868 1.7355 Equivalent annual investment 3,21,699 3,45,722 (8,00,000/2.4868) (6,00,000/1.7355) Total outflow per annum 4,51,699 5,95,722 (1,30,000 + 3,21,699) (2,50,000 + 3,45,722) Preference I II Decision: The company may prefer Machine A due to lower outflow.
Solved Scanner Appendix IPCC Gr. I Paper - 3 16 Chapter - 10 : Treasury and Cash Management 2013 - Nov [5] (c) Virtual banking: It refer to the provisions of Banking and related services through the use of Information Technology (IT) without direct interaction between Bank employee and customer. Advantages: 1. High speed Leads to prompt services with perfect accuracy 2. Cost Efficiency by lower cost of handling a transactions. 2013 - Nov [7] (c) Management of Marketable securities serves the purpose of liquidity and cash provided choice of investment is done accurately. The selection of securities should be guided by 3 principles: C Safety C Maturity C Marketability Thus, in situations when working capital needs are fluctuating, investment of excess fund should be done in short-term securities so as to maintain the liquidity. Chapter - 12 : Management of Receivables 2013 - Nov [6] (b) Particulars Present Option I Option II 1. Sales 30,00,000 42,00,000 45,00,000 2. Variable cost at 70% 21,00,000 29,40,000 31,50,000 3. Contribution (1-2) 9,00,000 12,60,000 13,50,000 4. Cost of Sales (u.c.) 21,00,000 29,40,000 31,50,000 5. Debtors T/O ratio 4 Times 3 Times 2.4 Times 6. Aug. Debtors = 4 5 5,25,000 9,80,000 13,12,500 7. Int. on Aug. Debts at 20% 1,05,000 1,96,000 2,62,500 8. Bad Debts (as % of sales) 3% = 90,000 5% = 2,10,000 6% = 2,70,000 9. Net Benefit (3-7 - 8) 7,05,000 8,54,000 8,17,500 Option I is preferable due to Maximum net benefit. Shuchita Prakashan (P) Ltd. 25/19, L.I.C. Colony, Tagore Town, Allahabad - 211002 Visit us : www.shuchita.com