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Please help me sir with this question. Fling co has annual credit sales of $4500000 and on average customers take 60days to pay, assuming a 360 days a year. As a result, Fling co has a trade receivable balance of $750000. Fling relies on an overdraft to finance this at an annual interest rate of 8%. Fling is considering offering an early settlement discount to it’s customers of 0.5% for payment in 30days. It expects that 25% of it’s customers(representing 35% of the annual credit sales figure) will pay in 30 days in order to obtain the discount. If fling co introduces the discount what will be the next savings, sir please how is the answer $2625 gotten
Currently the interest cost will be $750,000 x 8% = $60,000 per year.
If the offer the discount, then the average collection period will be (35% x 30 days) + (65% x 60 days) = 49.5 days.
Therefore the average receivables will be 49.5/360 x $4,500,000 = $618,750, and so the interest cost will be 618,750 x 8% = $49,500.Therefore there is an interest saving of 60,000 – 49,500 = $10,500.
The cost of the discount is 0.05% x 35% x 4,500,000 = 7,875
Therefore the net saving is 10,500 – 7,875 = $2,625.
I would suggest that you watch my free lectures on the management of receivables. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
sir while finding cost of dicount , we should annulise the discount right? since interest is annualised rate? the formula fr annualising discount 100/100-d^(365/t)-1
No, the discount does not need annualising in this type of question.
Have you watched my free lectures on the management of receivables?
no i have nt watched your videos sir but i had taken coaching for it outside.
why annualising of discount isnt needed for this type of question?then for wat questions should we annualise?
Annualising is only relevant in the case of a simple discount being offered to all customers. In this question (which is by far the most common type of discount question in the exam), some customers are expected to take the discount and others are not. The only way of answering it is the way that I have explained above.
I suggest that you watch my lectures – I explain both types of question with examples.
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