RECEIVABLES

WQZ Co is considering making the following changes in the area of receivables management: WQZ Co could introduce an early settlement discount of 1% for customers who pay within 30 days and at the same time, through improved operational procedures, maintain a maximum average payment period of 60 days for credit customers who do not take the discount. It is expected that 25% of credit customers will take the discount if it were offered. It is expected that administration and operating cost savings of #753,000 per year will be made after improving operational procedures and introducing the early settlement discount. 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.
Required
(a) Calculate and comment on whether the proposed changes in receivables management will be acceptable. Assuming that only 25% of customers take the early settlement discount, what is the maximum early settlement discount that could be offered? (7 marks)
(b) Discuss the factors that should be considered in formulating working capital policy on the management of trade receivables.