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Hi….
I’ve a query regarding the calculation of new average debtors. In this particular question, the turnover is $4000,000 and the discount offered is 1% if paid within 14 days and it’s been told that 2/3 customers would avail the discount.
Currently all sales are on 40 days’ credit with no discount. It’s been said that if the discount is availed by the customers, it will reduce average credit period taken by it’s customers to 26 days.
Current receivables are $550000.
Annual interest is 9% on overdrafts.My query is, the way they’ve calculated the new debtors figure is by subtracting discount of 1%*2/3*4000,000 from $4000,000..
26=x/4000,000-26667*365 = 283032
Why did they subtract the discount from the turnover? Would it make any difference if I don’t subtract the discount from the sales figure?One more thing, when I split the $4000,000 figure between those who availed the discount and those who didn’t for the purpose of calculating interest, it gives a different answer? Is the approach right?
Thanks
The reason the answer has subtracted the discount from the turnover is that the cash received is less the discount. However there is an argument over this and sometime the examiner subtracts the discount and sometimes he does not – I do not bother subtracting the discount (and you would still get the marks). The answer will be slightly different but that does not matter.
The approach in your last sentence is OK. I can’t tell why you got a different answer without seeing your workings (unless it is different simply because of not subtracting the discount – if that is the reason then your answer will not be much different and would not lose marks)
Please let me know where did I go wrong, as the answer in the BPP textbook does not split the Receivables between the fraction of customers who took the discount and those who did not. Thank you
Current Receivables per S.o.F.P 550,000
With discount 197,260
(4,000,000*2/3*14/365)+(4,000,000*1/3*26/365)
Reduction In receivables 352,740Cost
4,000,000*1%*2/3 26,667Benefits
Interest savings on overdraft 31,747
352740*9%
Savings on Administrative or Selling 12,000
Reduced Bad Debts 24,000
4,000,000*(3% – 2.4%)
Net Benefits from the Discount 41,080I do not have the BPP Study Text – only the Revision Kit, and so I do not have the question you are referring to.
Have you watched 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. If you are watching the lectures then you do not really need the Study Text – it is the Revision Kit that is essential.
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