Financial management revision question and answer

Banda Ltd. has four categories of debtors; A, B, C and D. The average collection period and the percentage of bad debts for each category of debtors is shown below:

Category Average collection period (days) Bad debts (%)
A 15 0.5
B 20 2.5
C 30 5.0
D 40 9.5

The profit per unit of the company‟s product is shown below:

  Shs. Shs.
Selling price   25
Less: materials 10  
Wages 9.5  
Variable costs 3  
Fixed costs 0.5  23
Profit   2

The company has the opportunity to increase its sales Shs. 10,000,000 per annum, split between categories C and D of the debtors in the proportion 2:3 respectively. The company borrows at an interest rate of 11.5% per annum (assume a year has 365 days).

Required:
(i) Calculate the additional contribution to be realized from the increased sales.

(ii) Calculate the bad debts expense arising from the increased sales for each category of debtors.
(iii) Compute the net profit or loss realized from the increased sales.
ANSWER

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