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Credit sales: $12,000,000
3 months creditcompany deciding to offer discount of 2% for payment within 10 days and reducing credit limit to 2 months.
it is estimated 50% of customers will take discount.
if the company requires 20% return on investment, what will the effect of discount be?
I was able to calculate the following but do not understand how to take it further. Could you please help me out.Discounts = 12,000,000*0.5*0.02 = 120,000
Before avg receivables =
(3/12)*12,000,000 = 3,000,000New Avg receivables = 1,164,384
(5/365) * 12,000,000 = 164,384
(1/12)*12,000,000 = 1,000,000Decrease in receivables = 3,000,000 – 1,164,384 = 1,835,616
Why are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers.
Your workings for the current average receivables is correct.
With regard to the new average receivables, you should be taking 5/365 and 1/12 of 50% x 12,000,000 (not on the whole 12,000,000).
The interest saving is then 20% x the decrease in the receivables.
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