Question

Williams Wholesalers Ltd at present requires payment from its customers by the end of the month after the month of delivery. On average, it takes customers 70 days to pay. Sales amount to $4 million per year, and bad debts to $20,000 per year.

It is planned to offer customers a cash discount of 2% for payment within 30 days. Williams estimates that 50% of customers will accept this facility, but that the rest, who tend to be slow payers, will not pay until 80 days after the sale. At present the company has a partly used loan facility costing 13%

per annum. If the plan goes ahead, bad debts will be reduced to $10,000 per annum and there will be

savings in credit administration expenses of $6,000 per annum.

Should Williams Wholesalers Ltd offer the new credit terms to customers? Support your answer with any calculations and explanations you consider necessary.

Answer 1