Sir can you please explain where I am getting this wrong?
This is from Open Tuition course notes: (Chapter 5, Example 1)
Customers currently take three months credit. We are considering offering a discount of 4% for payment
within one month.
Sales are $12,000,000 p.a..
We are paying overdraft interest of 20% p.a..
Calculate the effective % cost p.a. of the discount.
Should we offer the discount?
I have calculated as below: ($000)
Current:
Receivables: 12000 x 3/12 = $3000
Interest: @20% = $600
New Policy:
Receivables: 12000 x 96% x 1/12 = $960
Interest cost: $192
plus
Discount cost: $40
Total cost: $232
Hence, Co should offer discount.
Unfortunately that is not the answer in solution :(
Thanks
Ask the Tutor ACCA FM
Receivable Management
11y ago#1But you have not answered the question. The question asks for the % cost p.a.. What you have calculated is not a %.
Have you watched the lecture that goes with this? (There is no point in using the course notes without the lectures)
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