Cool Aid

COOLAID PRIVATE
LIMITED CASE
ANALYSIS
BY: GROUP 9
SIDDHARTH SAXENA
2016PGP183
SUMAN SOURAV
UDAY SHANKAR
2016PGP185
SECTION 3
2016PGP179
2016PGP180
2016PGP181
RAVITEJ VENKAT
VINAY GUNDECHA
VIVEK KHAMBRA
2016PGP184
Company Background
Radhemohan Gupta and Manmohan Gupta, two brothers, promoted

CoolAid Private Limited (CAPL) near Delhi in 1995
They owned about 60 per cent of the capital and are solely responsible
for running the business
manufactured all the components of an aircooler in their factory
Evaluate the margin costs and

benefits of offering a cash discount
(All figures are in lakhs)
Average collection period existing
Average collection period new
Bad debt % existing
Bad debt % new
First year Second Year

90(historical data has been considered)
22.5
2%
2.50%
Sales revenue
357.1
428.52
Cost of goods sold
285.1
342.816
Less:Variable cost 40%of COGS
114.04
137.1264
Contribution
243.06
291.39
1.02
2.410425
additional collection expenses
0.5
Bad Debt
dicount given before 10 days
2%
cost of discount
credit sales % of total sales
90%
other expenses
increase in total sales
20%
Net contribution
6.4278
10.61
11.4588
242.04
282.56
Variable cost
COGS
80%
Difference in contribution
40.52
Given:
Rate of interest
15%
Recommendations
Since there is a considerable increase in the benefits to the company

even after the discount is offered so the company may go ahead with its
new credit policy
The cost of investments in accounts receivables also decreases

substantially be 8.43 lacs thus reducing the finance cost of the company
The average days receivables also decreases from 90 days to 22.5 days
even after taking into account the marginal new customers, thus
decreasing the receivables turnover period
Since the company takes in a number of new employees, so it is

necessary to take more stringent measures to ensure regular collection of
recievables
What if interest rates decline in future years?

How would this affect your recommendation
The rate of interest is a determinant of the investments in accounts

receivables
So, if the interest rate decreases, then the investment in account

receivables will decrease
Here the collection period decreases significantly from 90 days to 22.4

days
So unless there is a drastic decrease in the reduction in the decrease of

interest rates, there shall be no change in the recommendations
Implications of these changes
the collection period decreases from 90 days to 22.5 days
The bad debts increased from 1.02 to 2.14 but this increase is more
than compensated by the increase in sales
The total cost of investment in the receivables has decreased from 12

lacs to 3.6 lacs
The total benefit from the new policy is expected to be 3980935.5
Recommendations
Use proper debtor Scheduling
Use seasonal dating
Extend line of credit to the debtors
Adopt stricter norms with respect to collection and decrease float
Implications of Policy changes
There would be level production through out the year
The inventory holding costs of the company would be reduced
Decrease in float
Incentivise buyers to order early
Possible reasons for the slowdown

in accounts receivable collections
2006
2007
2008
Debtors turnover
6.213244
4.20839
3.334267
Average collection period
57.94074
85.54339
107.9698
0.274%
0.303%
0.286%
%of bed debt to sales
Average collection period is increasing at a higher rate than sales revenue

Credit information and evaluation and scoring is very poor, as we seek no
collateral and average collection period has increased alarmingly as compared
to historical trend
Short term goals of the company is to prepare a contingency plan to stem the
increasing average collection period which is way higher than the historical
collection period of 40 days
What are the primary elements of a firms credit policy?

Is CoolAid Company focusing on
the appropriate element of its credit policy revision?
Term of sale
Credit analysis
Collection policy
Yes, Cool-aid is focusing on the appropriate element of its credit policy

revision.
THANK YOU!

Cool Aid

Uploaded by

Copyright:

Available Formats

Cool Aid

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cool Aid

Uploaded by

Copyright:

Available Formats

COOLAID PRIVATE

Radhemohan Gupta and Manmohan Gupta, two brothers, promoted

manufactured all the components of an aircooler in their factory

Evaluate the margin costs and

First year Second Year

Cost of goods sold

Less:Variable cost 40%of COGS

additional collection expenses

dicount given before 10 days

credit sales % of total sales

increase in total sales

Since there is a considerable increase in the benefits to the company

The cost of investments in accounts receivables also decreases

Since the company takes in a number of new employees, so it is

What if interest rates decline in future years?

The rate of interest is a determinant of the investments in accounts

So, if the interest rate decreases, then the investment in account

Here the collection period decreases significantly from 90 days to 22.4

So unless there is a drastic decrease in the reduction in the decrease of

Implications of these changes

the collection period decreases from 90 days to 22.5 days

The total cost of investment in the receivables has decreased from 12

The total benefit from the new policy is expected to be 3980935.5

Use proper debtor Scheduling

Use seasonal dating

Extend line of credit to the debtors

Adopt stricter norms with respect to collection and decrease float

Implications of Policy changes

There would be level production through out the year

The inventory holding costs of the company would be reduced

Incentivise buyers to order early

Possible reasons for the slowdown

Average collection period

%of bed debt to sales

Average collection period is increasing at a higher rate than sales revenue

What are the primary elements of a firms credit policy?

Yes, Cool-aid is focusing on the appropriate element of its credit policy

You might also like