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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › exam kit question
in an attempt to improve the liquidity position of a company, the company is considering offering an early settlement discount to its customers. which of the following would be the outcome of offering early settlement discounts?
a-sales increase
b-administrative costs decrease
c-bad debts increase
correct answer: sales increase.
Sir my doubt is why will the administrative costs not decrease? as bad debts are a part of administrative expenses, so the fact remains that early settlement discounts would offer the customers a chance to pay early at reduced rates would lead to a reduction in bad debts and hence a lowering of admin expense, so why not option B??
There will be extra costs of administering the discount. There might be a saving in bad debts, but we cannot say that any saving that there will be in bad debts would be greater than the costs of administering the offering of the discount – we do not know.