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Wallace Co has annual credit sales of $4,500,000 and an average customer takes 60 days to pay, assuming a 360-day year. As a result, Wallace Co has a trade receivables balance of $750,000. The company relies on an overdraft to finance this at annual interest rate at 10%.
Wallace Co is considering offering an early settlement discount of 1% for payment in 30 days. It expected that 25% of its customers (representing 35% of the annual credit sales figures) will pay in 30 days in order to obtain the discount.
If Wallace Co introduces the proposed discount, what will be the NET impact?
Answer: 2625 cost
Reduction in receivables = 4,500,000 x 30/360 x 35% = 131250
Alternatively: average receivables days will fall to (60 x 0.65) + (30 x 0.35) = 49.5 days which is a reduction of 10.5 days.Please can you explain where 60 x 0.65 and 30 x 0.35 came from?
Thanks
It states that Wallace customers take 60 days to pay in the first paragraph then it says that
Wallace Co is considering offering an early settlement discount of 1% for payment in 30 days. It is expected that 25% of its customers (representing 35% of the annual credit sales figures) will pay in 30 days in order to obtain the discount.So that means 35% or 0.35 of customers take 30 and the rest take 60 which is 0.65 or 65% (bal fig)
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