The credit manager of ABC Company has to decide on a proposal for liberal extension of credit which would result in a slowing process of the average collection period from one to two months. The...

The credit manager of ABC Company has to decide on a proposal for liberal extension of credit which would result in a slowing process of the average collection period from one to two months. The company’s product is sold for Rs.20 per unit, of which Rs.15 representing variable cost. The current actual sales amounting to Rs 2,400,000, entirely on credit the average total cost per unit is Rs.18.

The relaxation in credit policy is expected to result in a 25% increase in sales. The required rate of return is 25% on investment.

Calculate the cost of investment in receivables, if credit period is allowed to customers is one month.