Consignment Profit, Del Credere Commission and Unsold Stock
An electronics wholesaler in Pune consigned 600 ceiling fans to a dealer in Kochi. Each fan cost the consignor ₹1,500. The consignor paid freight ₹24,000 and transit insurance ₹6,000. The consignee paid unloading ₹9,000 and godown rent ₹8,000, and spent ₹18,000 on selling expenses. During transit 60 fans were damaged; the insurer admitted a claim of only ₹75,000. The consignee sold 420 fans at ₹2,000 each. The agreement allows a commission of 5% on sales and an additional del credere commission of 2.5% on sales. The consignee reports that ₹7,000 became irrecoverable from customers. No damaged fans were sold, and 120 fans remain unsold. The consignor closes the books on 31 March 2025 and wants the true profit on the consignment, not merely the cash surplus received.
1. Value the closing stock and compute the abnormal loss, explaining how each cost element is allocated.
Read the worked answer
Consignor's expenses total ₹24,000 + ₹6,000 = ₹30,000 on 600 units, i.e. ₹50 per unit.
Abnormal loss (60 units):
- Cost: 60 × ₹1,500 = ₹90,000
- Consignor's expenses: 60 × ₹50 = ₹3,000
- Total cost of damaged goods = ₹93,000
- Less insurance claim = ₹75,000
- Abnormal loss = ₹18,000
Closing stock (120 units):
- Cost: 120 × ₹1,500 = ₹1,80,000
- Consignor's expenses: 120 × ₹50 = ₹6,000
- Consignee's unloading: ₹9,000 relates to the 540 units received, so 120/540 × ₹9,000 = ₹2,000
- Value = ₹1,88,000
Godown rent and selling expenses are period costs of the consignment and are not carried into stock. Unloading is a non-recurring cost of bringing goods to saleable condition, so its share is included in stock valuation. The abnormal loss is calculated before adding any consignee expenses because the fans never reached the consignee's godown.
2. Prepare the consignment account and compute the profit on consignment.
Read the worked answer
| Consignment Account | ₹ | ₹ |
|---|---|---|
| To Goods sent on consignment (420 × 1,500) | 6,30,000 | By Sales (420 × 2,000) |
| To Consignor's expenses (21,000) | 21,000 | |
| To Consignee's unloading (7,000) | 7,000 | |
| To Godown rent | 8,000 | |
| To Selling expenses | 18,000 | |
| To Commission (5% × 8,40,000) | 42,000 | |
| To Del credere commission (2.5% × 8,40,000) | 21,000 | |
| To Profit on consignment | 93,000 | |
| Total | 8,40,000 | Total |
Reasoning: only the cost of the 420 fans sold is charged against sales; the cost of the damaged and unsold fans is dealt with separately. Similarly, only the sold share of the consignor's expenses (₹30,000 × 420/600 = ₹21,000) and of unloading (₹9,000 × 420/540 = ₹7,000) is charged. The ₹7,000 bad debt is not charged to the consignment because the del credere commission makes the consignee responsible for irrecoverable debts.
3. The consignee asks to be relieved of the del credere obligation. Would the consignor's profit rise or fall, and by how much?
Read the worked answer
Without del credere commission:
- Commission saved: ₹21,000 is added back to profit.
- Bad debts now borne by the consignor: ₹7,000 is deducted.
- Net effect: +₹21,000 − ₹7,000 = +₹14,000.
Revised profit = ₹93,000 + ₹14,000 = ₹1,07,000.
So the profit would rise by ₹14,000. However, the comparison assumes the ₹7,000 is the only bad debt; the del credere commission buys protection against the whole credit risk, so the consignor should also weigh the risk of larger future defaults against the certain ₹14,000 saving.