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Dear Tutor,
I hope you’re doing great!
Management of Accounts Receivable and Payable10. Ling Co has annual credit sales of $4,500,000 and on average customers take 60 days to pay, assuming a 360-day year. As a result, Ling has a trade receivables balance of $750,000. Ling relies on an overdraft to finance this at an annual interest rate of 8%.
Ling is considering offering an early settlement discount to its customers of 0.5% for payment in 30 days. It expects that 25% of its customers (representing 35% of the annual credit sales figure) will pay in 30 days to obtain the discount.
If Ling introduces the proposed discount, what will be the NET saving? (Answer in $ in the Answer box)
The correct answer is $2625
WORKING
Reduction in receivables = $4.5mx 30/360 x 0.35=$131,250
Interest saved = $131,250 x 8% = $10,500
Cost of discount = $4.5m x 0.35 x 0.005 = $7,875
Net saving = $10,500-$7,875 = $2,625
If I didn’t want to directly calculate the reduction in receivables how do I calculate the new receivables?
4.5m×30/360 will it be the new receivables
Or do I calculate the average receivables like 0.25*30+0.75*60= 52.5 days
Can you please solve my doubtIf it asked you
To calculate the average receivables, you are correct to use the weighted average formula
Multiply the percentage of customers paying in 30 days (25%) by the number of days (30), and multiply the percentage of customers paying in 60 days (75%) by the number of days (60). Add these two values together to get the average receivables period, which is 52.5 days.
but even though
the receivables I am getting is 4500000*52.5/360=656250
now if i subtract the 750000 (750000-656250) the amount is 93750 which is not same as the amount in question that is 131250I have no idea what you are trying to do?
Reduction in receivables = $4.5mx 30/360 x 0.35=$131,250
Because 35% of current receivables will take this discountInterest saved = $131,250 x 8% = $10,500
So these have reduced the outstanding receivables by 131,250 so you will save interest on the overdraftCost of discount = $4.5m x 0.35 x 0.005 = $7,875
Is the money lost because of the discountNet saving = $10,500-$7,875 = $2,625
The net effectIf we were to calculate the revised receivables will the amount be 4.5*52.5/360=656250.will this be the revised receivables ,as you said the new receivable days are correct 52.5 days as weighted average 0.25*30+0.75*60 = 52.5 days,
The question states that
Ling has a trade receivables balance of $750,000 which take @ 60 daysLing is considering offering an early settlement discount to its customers of 0.5% for payment in 30 days. It expects that 25% of its customers (representing 35% of the annual credit sales figure) will pay in 30 days to obtain the discount.
It says quite clearly that 25% of its customers (representing 35% of the annual credit sales figure)
It states of annual credit sales!!!!!!!!! will pay in 30 days to obtain the discount.So you have to take sales
4.5m * 30/360 * 0.35Dear Tutor,
Thank you so much for giving a brief explanation, but if the question had asked what revised receivables days and trade receivables would be how we will calculate that, like the 4.5*30/360*0.35 is the direct calculation of the difference between the new and the old receivables but If I wanted to take the difference by subtracting the new and the old receivables how will we calculate the new receivables
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