Lolymino's customers are required to pay on 30 days, but on average pay on 45 days. Total sales revenue is £4,500,000 and the company expects irrecoverable receivables of £300,000. A suggestion has been made to offer a 5% discount to customers paying on 30 days. It is expected that 40% of customers will take advantage of this. Irrecoverable receivables would be expected to fall by £75,000 and administrative savings on credit control would amount to £25,000. Lolymino finances its working capital with a bank overdraft that costs 7.5% per annum. Should the suggested 5% discount be offered? What % discount would be most appropriate?

Lolymino's customers are required to pay on 30 days, but on average pay on 45 days. Total sales revenue is £4,500,000 and the company expects irrecoverable receivables of £300,000. A suggestion has been made to offer a 5% discount to customers paying on 30 days. It is expected that 40% of customers will take advantage of this. Irrecoverable receivables would be expected to fall by £75,000 and administrative savings on credit control would amount to £25,000. Lolymino finances its working capital with a bank overdraft that costs 7.5% per annum. Should the suggested 5% discount be offered? What % discount would be most appropriate?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 5P

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