Managing receivable

You would use the 20% in the same way as you would if they were paying 20% overdraft interest. So the longer credit is effectively costing them interest, but the increased sales are earning them more profit. They need to compare the extra profit from the goods with the extra interest involved to decide whether or not it was worth doing.

Precisely :-)

If there is an overdraft then the cost is the overdraft interest. If there is not an overdraft then the cost is the interest that is lost by having less to invest. Either way, it is still effectively a cost - whether you pay interest directly or whether you lose interest that you could have earned.

Current receivables are 1/12 x 2.4M = 200,000 New receivables are 2/12 x (2.4M x 1.2) = 480,000 So the extra interest cost = (480,000 - 200,000) x 15% = 42,000 The extra profit = 20% x 120,000 = 24,000. So there is a decrease of 42,000 - 24,000 = 18,000. So your answer is correct :-) :-)