Question

Q1. Best Value Company has provided the following information:

Current Annual Sales (Credit Sales): P3,600,000

Terms: 45 Days

Interest Rate or Cost of Finance: 15% p.a.

Potential New Policy:

Analyst 1 has suggested to offer a discount to customers with this policy: 1/15 net 45. Analyst 1 expects that 50% of customers will take advantage of the discount. Analyst 2 however says that customers will not be enticed and for 50% of customers to take advantage of the discount, the policy should be 2/15 net 45. Should the company follow the recommendation of Analyst 2? Why or why not? Show your solutions.

Q2. Why do you think an increasing accounts receivables balance (without the corresponding increase in sales) is a cost to a business?

Q3. The company's end of month receivables is 70% of monthly sales. From January to April, sales amount to P100,000 each month. For the rest of the year (May to December), sales amount to P50,000 each month. The company extends credit terms to customers up to a maximum of 20 days. Assuming 360 days in a year and 30 days in a month, what can you say about the company's receivables management? Does the company need to improve its collections? Please show your solutions.

Answer 1

Proposal	Amount received in 15 days = 3600000*0.5	Discount	Net Amount after discount	Interest for 30 days	Net Gain / Loss
	A	(B=A*1%)	(C = A-B)	(D= C*15%*30/360)	(D-B)
Analyst 1	1800000	18000	1782000	22275	4275
	Amount received in 15 days = 3600000*0.5	Discount	Net Amount after discount	Interest for 30 days	Net Gain / Loss
	A	(B=A*2%)	(C = A-B)	(D= C*15%*30/360)	(D-B)
Analyst 2	1800000	36000	1764000	22050	-13950

Analysis of proposals :

If the amount is received on the 15th day i.e., earlier by 30days, then that amount can be invested and the entity can earn interest without blocking its amount in accounts receivable for 45days and this has to be done by attracting customers by giving cash discounts for prompt payments i.e., 1% proposed by Analyst 1 = 18000 and interest can be earned by investing net amount after the discount is 22275, hence there is a net gain of P4275

Analyst 1 proposal can be accepted because the Benefit exceeds the cost.

But in the case of Analyst 2 's proposal, it is not beneficial since there is a net loss of P13950

Since there is a net loss analyst 2 proposal should not be followed.

2. Because the amount is blocked in Accounts receivables and it will increase the finance costs to company, which is not favorable situation every time