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Hello John,
“Credit sales of WQZ Co are currently $87.6 million per year and trade receivables are
currently $18 million. Credit sales are not expected to change as a result of the changes in
receivables management. The company has a cost of short?term finance of 5.5% per year.”1. The above extract is from the December 2010 exam; and one of the requirement is to calculate assess the settlement discount. In the answer, $87.6m was used to calculate the avg receivables.
2. Could you explain why? Why $18 m was not used? What the statement actually mean here?
Thanks
$18M is the current level of receivables.
If they offer the discount then some customers will pay sooner which will mean that the average receivables will not stay at $18M. Given that we know the sales will remain at $87.6M and we know the new payment schedule then we can calculate the new average receivables in the way that I do in my lectures.
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