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A Co has a turnover of $ 900,000 (90% of which is on credit) and receivable days are currently 42 days despite the company only offering 30-days credit. A Co finances its receivables using its overdraft which has an annual interest cost of 8% and has a contribution margin of 30%.
A Co is considering the introduction of an early settlement discount at the same time as extending their standard credit terms to 50 days. The Co would offer customers a 1% discount for payment within 14days. it is anticipated that 40% of customers will take the discount, while those that do not take the discount will keep the new standard credit terms. As a result of the extended credit terms, credit sales are expected to rise by 10%. Due to extra administration involved it is thought that administration costs will rise by $ 10,000 per year.
Evaluate whether or not A Co should offer the discount.
Please do not simply set me a question!
You cannot expect me to type out a complete answer – presumably anyway there is an answer in whatever book you found the question.
Say which part is causing you a problem and then I will try and help.
If you have watched the lecture on the management of receivables then you should not have too much of problem because it is a very standard type of question.
When you are listing the costs and the benefits, one of the benefits is that the contribution will be higher (because the sales increase by 10%).
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