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when we currently receivable days to be 50 days turnover 4M and receivables to be 550000.
Discount offered is 1% to customers paying within 14 days (2/3) take the advantage of this.
The co. expects that offering a discount for early payment will reduce average credit period taken taken by its customers to 26days.
Please help on how to calculate the net benefit using the method in your lectures.
Thanks in advance.BPP do it the same way as I do, so I am not sure which bit of their answer is causing you a problem.
The current receivables are 550,000 (the fact that the question says they are on 40 days credit is not relevant – that does not mean that people actually take 40 days. I don’t know where you get 50 days from – if you worked it out from the 550,000 then there was not much point since we know the current receivables.)
The new average credit period is 26 days. Since we have been told the average, there is no need for us to try an calculate it (as we usually need to).
The new average receivables you can actually make two different assumptions. You can either just take 26/365 x $4M, or you can take 26/365 x (4M – 26667). (26667 is the discount.) There are arguments both ways, and because of that the examiner said that either would get full marks.The approach is no different at all from the way I do it. The question is actually much easier than usual because you are given the current receivables, and you are given the new average collection period (usually we have to spend time calculating both of them). This is the reason that this part was only worth 5 marks in the exam (and was almost irrelevant compared with the other parts, which were all written and did not require any of the figures from part (a).
(As usual, it was the written parts that would decide whether you passed of failed – not the arithmetic.)Thank you sir and i did all the theory it was just the arithmetic part which i ws doing it abit wrong. Thank you really helpful.:)
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