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Hello sir, i am confused with this question. can you help me to solve the question below. Thanks 🙂
X ltd has average credit sales of 5M and its customers take on average 65 days to pay.
The company is considering a proposal to introduce a cash discount of 3% of the invoiced amount if customers pay within 30 days after sale. it is predicted that 60% of customers will be paid within 30 days and the remaining customers will take 70 days. X ltd currently pays 10% interest on the overdraft. Should X ltd introduce the new credit policy?The teacher told me that the calculation for the 30 days is like this
(5M x 0.60)-(5M x 0.60 x0.03) x (30/365)
isn’t it supposed to be like this
(5M x 0.60×30/365)Strictly what your teacher has done is correct, because the amount owing is 3% less due to the discount.
However, as I explain in my free lectures on this, the examiner sometimes subtracts the discount in his answers and sometimes does not. He does though give full marks to both – the different in the final answer is not significant anyway for making the decision 🙂
I do suggest you watch my free lectures on this. The lectures are a complete free course and cover everything needed to be able to pass the exam well.
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