Hello John,
W Co has a annual credit sales of $ 4,500,000 and on average customers take 60 days to pay,
assuming a 360 a year. As a result , W Co has a trade receivables balances of $ 750,000. The company relies on overdraft to finance this at an annual interest rate of 10%.
W Co is offering an early settlement discount of 1% for payment in 30 days.It expected that 25% of its customers( representing 35% of the annual credit sales) will pay in 30 days in order to obtain the discount.
What is the net impact?
1. The answer is $2,625.
2. In the answer, 35% has been used and not 25%
3. Could you explain why?
Thanks
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Working Capital
5y ago#1The number of customers taking the discount is irrelevant. The total amount of the discount depends on the amount of the sales paid within 30 days, and 35% of the sales are paid for within to days (whether they are all sold to just one customer or to 100 customers).
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