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John Moffat.
John Moffat.-
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AFNAAAN
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question wqz co from kaplan kit
why didnt they annualise the discount while calculating percentage cost of early settlement discount?
we are supposed to annualise the discount wen calculating it ryt sir??cuz discounts are not annual rate whereas interest from short term finance is annual rate
John Moffat
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I do not have the Kaplan Kit – only the BPP Revision Kit.
If it is marked as being a past exam question, then tell me the date of the exam. Otherwise I am afraid that I cannot help you given that I do not have the Kaplan Kit.
AFNAAAN
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its in past exam dec 10
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 (c) 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?John Moffat
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We only annualise the discount if the same discount is taken by all customers. Otherwise, as in this question, we look at the cost over the year of giving the discount and compare with the interest savings over the year.
I do explain all this in my free lectures on the management of receivables.
AFNAAAN
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okay! in simple words
you are saying while calculating %cost of early settlement discounts we need to annualise the discount only if all the customers are taking the dicounts ??ryt??and v need not annualise the discount if everyone isnt taking the discountJohn Moffat
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Agreed (although have you actually watched the free lectures on this?).
AFNAAAN
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