Question

3.1 REQUIRED Use the information provided below to calculate the profit to Mersat Stores if:

3.1.1 All the sales are for cash. (1 mark)

3.1.2 Seventy percent (70%) of the sales are on credit and the balance is for cash. All accounts are paid in 30 days. 3.1.3 All the sales are on credit and the credit terms are 4/10 net 30 days. Suppose this discount applies to 75% of the credit sales.

INFORMATION

Mersat Stores expects to sell 10 000 units of Product Zap at a price of R25 per unit. The cost to manufacture the product is R10 per unit. If the sales are made on credit, collection costs of approximately 5% of sales are likely to be incurred. The cost of capital to the company is 18%

Answer 1

Units to be sold		10,000
Price/Unit		25
Cost to manufacture		10
Collection cost		5%
(for credit sales)
Cost of capital		18%
3.1.1) All Sales are in cash
Sales (10,000 units x 25)		250,000
Less : Cost to manufacture (10,000 units x 10)		100,000
Profit		150,000
3.1.2) 70% in credit, balance in cash. Accounts paid in 30 days
Sales (10,000 units x 25)		250,000
Less : Cost to manufacture (10,000 units x 10)		100,000
Less : Collection cost (5% on credit sales)		8,750	(5% x 70% x 250000)
Less : Cost of capital		2,625	(250000 x 70% x 18% x 30/360)
Profit		138,625
3.1.3) All sales are on credit, credit terms - 4/10 net 30 days, discount applies to 75% of sales)
4/10 means that customer can avail 4% discount on sales if paid within 10 days from the invoice date
There will be two parts of collection :
a) 75% of sales are through discount, which means that collections are received within 10 days, but only 96% of the amount is received
= 250,000 x 75% x 96%
=180000
b) 25% of sales are through usual discount, let's assume received on the 30th day
=250,000 x 25%
=62,500
Calculation of profit
Sales		242,500	(180,000 + 62,500)
Less : Cost to manufacture (10,000 units x 10)		100,000
Less : Collection cost (5% on credit sales)		12,125
Less : Cost of capital :
On discounted sales	900		(180,000 x 18% x 10/360)
On credit sales	938		(62,500 x 18% x 30/360)
Total cost of capital		1,838
Profit		128,538