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Annual turnover (given) : $4000000
Current level of debtors (given) : $550000Velm Plc is considering offering a discount of 1% to customers paying within 14 days. the company also expects that offering a discount for early payment will reduce the average credit period taken by its customers to 26 days. twp-third of customers are expected to take advantage of the discount.
Question:
The correct way to find the proposed level of debtors?alternative 1 :
Cost of 1 % discount = $4m x 1% x 2/3 = $26,667
Proposed level of debtors = ($4m – $26,667) x (26/365) = $283031alternative 2 :
Average collection period = (2/3 x 14) + (1/3 x 26) = 18 days
Proposed level of debtors = ($4m x 18) / 365 = $197260Hi,
I think both are incorrect
as Cost of Disc. = 2/3 x 1% x 4000000 = 26,667$
4,000,000 – 26,667 = 3,973,333 which represents all 1
so 1/3 of 3,973,333 X 26/365 = 62,895 on avg..
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I believe alternative one is right. In alternative 2 you’re working out the average for an 18 day average but the question already says they expect it to be 26 days so that’s the one you need to find.
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