Annual turnover (given) : $4000000
Current level of debtors (given) : $550000
Velm 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) = $283031
alternative 2 :
Average collection period = (2/3 x 14) + (1/3 x 26) = 18 days
Proposed level of debtors = ($4m x 18) / 365 = $197260
ACCA Forums
FMComputation of Trade Receivables
Hi,
I think both are incorrect
as Cost of Disc. = 2/3 x 1% x 4000000 = 26,667$
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..
** 1/3 of 3973333 x 26/365 = 94,344 on avg. **
11y ago#3I 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.
11y ago#4Aleksandrs is completely correct :-)
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