Tutorial #4 Sep 3, 2013

Managing Receivables
Practice Questions




1 R & R PLC

Cost to the company of offering the discount:

Cost = +

98

- = 44.58%



2 Shanks Limited

a) Receivables Days =
8

= uays

b) Cost of financing Receivables = $8m x 14% = $1.12m

c) Sales lost from giving discount = $40m x 50% x 2% = $400,000

Situation NOW
Receivables days (above) = 73 days
Receivables (above) = $8m
Cost of finance (above) = $1.12m

Predicted Situation

Predicted Receivables:
Taking Discount: (10/365) x $40m x 50% = $ 547,945
Not taking Discount: (73/365) x $40m x 50% = $4,000,000
Total Predicted Receivables = $4,547,945

Cost of financing Receivables = $4,547,945 x 14%
= $636,712
Comparing Costs
Cost of financing: $1.12m - $636,712 = $483,288 Savings
Cost of discount = $400,000
Benefit (Savings) = $483,288
Net Benefit = $83,288

Therefore we should offer the discount.







3 Ruby PLC

N.B.: We are given Average Receivables days of 26. This could be used as a short-cut in the
answer. The average days is calculated as:

14 days x (2/3) = 9.33 days
50 days x (1/3) = 16.67 days
26.00 days



Cost of discount = $4,000,000 X 1% x (2/3) = $26,667

Current Situation
Receivables = $550,000
Receivables Days = ($550,000/$4,000,000) x 365 = 50 days
Cost of financing Receivables = $550,000 x 9% = $49,500
Bad debts = 3% x $4,000,000 = $120,000

Projected Situation
Receivables:
$4,000,000 x (14/365) x (2/3) = $102,283
$4,000,000 x (50/365) x (1/3) = $182,648
Predicted Receivables = $284,931

Cost of financing Receivables = $284,931 x 9% = $25,644
Bad debts = 2.4% x $4,000,000 = $96,000
Salaries saved = $12,000

Savings
Reduction in Receivables = $550,000 - $284,931 = $265,069
Reduction in Cost of Financing Receivables = $49,500 - $25,644 = $23,856
Reduction in bad debts = $120,000 - $96,000 = $24,000

Summary
Total Savings = $23,856 + $24,000 + $12,000 = $59,856
Cost of discount = $26,667
Net Benefit = $33,189


Therefore, based on calculations above, Ruby PLC should offer the discount