Benmore traders used to have a debtors collection period and creditors settlement period of 30 days. The

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Question:

Benmore traders used to have a debtors collection period and creditors settlement period of 30 days. The financial manager has prepared the following two incomplete budgets to help her with a very important decision. She must decide whether or not the debtor’s collection should be extended to 60 days in order to boost sales revenue or whether to keep the collection period constant at 30 days.

	March 20.8 (R)	April 20.8 (R)	May 20.8 (R)	June 20.8 (R)
Abbreviated statement of comprehensive income
Sales (all on credit)	175 000	175 000	175 000	175 000
Cost of sales	(87 500)	(87 500)	(87 500)	(87 500)
Gross profit	?	?	?	?
Expenses paid in cash	(32 000)	(32 000)	(32 000)	(32 000)
Net profit	?	?	?	?
Bank balance
Opening balance for the month	200 000	?	?	?
Movement during the month	?	?	?	?
Expenses paid in cash	?	?	?	?
Creditors settled in cash	?	?	?	?
Cash receipts from debtors	?	?	?	?
Closing balance for the month	?	?	?	?

Scenario 2-Increasing the collection period, causing a rise in expected sales

	March 20.8	April 20.8	May 20.8	June 20.8
Abbreviated statement of comprehensive income
Sales	175 000	190 000	220 000	368 000
Cost of sales	?	?	?	?
Gross profit	87 500	95 000	110 000	184 000
Expenses paid in cash	(32 000)	(32 000)	(32 000)	(32 000)
Net profit	?	?	?	?
Bank balance
Opening balance for the month	200 000	?	?	?
Movement during the month	?	?	?	?
Expenses paid in cash	?	?	?	?
Creditors settled in cash	?	?	?	?
Cash receipts for debtors	?	?	?	?
Closing balance for the month	?	?	?	?

Note that all merchandise is purchased on credit and sold within the same month. There were no outstanding amounts from debtors on 1 March 20.8

(i)Calculate the mark-up percentage applied by Benmore Traders

(ii)Calculate the corresponding gross profit percentage (gross margin)

(iii)Complete the two scheduled budgets by filling in the missing figures

(iv)There is an obvious risk of falling into a debt trap if the debtors collection is extended, while keeping the creditors settlement period constant. However will the business be making itself guilty of overtrading? Substantiate your answer.