Fleshwick Traders has a large overdraft on which interest of 17 per cent per annum is being charged. The directors are considering offering cash discounts to customers to encourage prompt payment.

Annual sales, all on credit, amount to £365,000, and the receivables figure at present is £90,000. The sales director considers that a discount of 2.5 per cent for settlement in 10 days would be taken up by about one-third of their customers. The finance director thinks that a larger discount would be required to achieve this result. Assuming that the sales level remained constant:

a Would it be worth offering the discount if the sales director is right?

b What is the largest discount the company could offer without a reduction in profits?

c Assume that each £1 of sales contributes 20 pence to non-current costs and profits. If the company decided to offer a 5 per cent cash discount for payment in 10 days, and it is taken up by onethird of its customers, how large an increase in sales would be required to maintain profits?