Question

Fahmi Enterprise has a cash-only sales policy. It is considering changing to a credit policy of net 30 days. Information related to the current and new policies is given in the table below. The required rate of return is 0.75 percent per month.

	Current Policy	New Policy
Price per unit (RM)	15.00	15.50
Cost per unit (RM)	8.00	8.40
Unit sales per month	2,000	2,050

Perform an analysis to show whether or not Fahmi Enterprise should adopt the new policy?

Answer 1

Computation of Profit under old policy

S.No	Particulars	Amount( RM)
A	Price Per Unit	15
B	Cost per unit	8
C	No.of Units sold	2000
D	Total revenue ( A*C)	30000
E	Total Cost ( B*C)	16000
F	Total Profit ( D-E)	14000

Computation of Profit under New policy

S.No	Particulars	Amount( RM)
A	Price Per Unit	15.5
B	Cost per unit	8.4
C	No.of Units sold	2050
D	Total revenue ( A*C)	31775
E	Total Cost ( B*C)	17220
F	Operating Profit ( D-E)	14555
G	Interest ( Oppurtunity Cost)	238.313
H	Net Profit( F-G)	14316.687

We Can observe that Profit under new policy is greater than old policy, So it is advisable to accept the new policy.

Working Note for Interest Calculation:

Given Interest rate per month = 0.75%

Since Our funds are blocking for 1 month there is an oppurtunity Cost of Interest

Interest for 1 month = RM 31775*0.75%

= RM 238.313

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