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In working out whether the proposed changes in receivables management will be acceptable.
I am working out this part as
Current
Admin Cost 753000
Bad Debt –
Cost of Capital (18,000,000 x 5.5%) 990,000
TOTAL 1,743,000Proposed
Admin Cost –
Bad Debt –
Cost of Capital (12,600,000 x 5.5%) 693,000
Settlement discount (87600000 x 25%) x 1% 219,000
TOTAL 912,000net benefit of early settlement $1743000-912000=$831000
queries:
a. I am concern at this method that I am using because it does not reflex the step by step approach in the answer solution provided by the examiner but the only thing is that the net benefit comes back to their answer
SHOULD I USE THIS METHOD TO WORK OUT THE CHANGES IN RECEIVABLES OR FOLLOW THE EXAMINER APPROACH?
b. As I am using the method above CAN I WORK OUT THE MAXIMUM EARLY SETTLEMENT DISCOUNT THAT COULD BE OFFERED WITH THE FIGURES I HAVE. I am not sure how to work it out under the method I am using.
THANKS
Your approach is fine – it would get full marks.
To get the maximum discount, you can afford the total discount to increase by 831000 to 1,050,000.
This will be equal to 87600000 x 25% x X%, where X is the discount.
If you make the two equal you will get the value of X – the maximum % discount.
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