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To analyze the implications of relaxing the credit policy for Alpha Ltd., it is essential to evaluate the effects on sales, costs, receivables, and overall working capital management. Currently, Alpha Ltd. sells 20,000 units at Rs. 100 per unit, with a variable cost of Rs. 88 per unit and an average cost of Rs. 92 per unit. The gross contribution per unit, calculated as selling price minus variable cost, is Rs. 100 – Rs. 88 = Rs. 12 per unit. At the current sales volume, total contribution amounts to 20,000 × 12 = Rs. 240,000. The net profit per unit, considering the average cost, is Rs. 100 – Rs. 92 = Rs. 8, giving total profit of 20,000 × 8 = Rs. 160,000. The current credit policy results in an average collection period of 36 days. This indicates that accounts receivable are tied up for over a month, affecting the liquidity position and the firm’s ability to finance operations without resorting to external borrowing. Managing receivables is a crucial component of working capital management, as it directly impacts cash flow. Extending the credit period may attract more customers, potentially increasing sales volume. However, it will also increase the investment in accounts receivable, raising the risk of bad debts and affecting the cash conversion cycle. To evaluate the impact of relaxing the credit policy, one must consider several factors. First is the expected increase in sales volume. If the company relaxes its credit __________ ___ ______ ______ _______ ____ ____ ________ ________ ________ ___ _______.
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