Bowland plc produces and sells decorative glass door panels. The company was once the market leader, but increasing competition is now threatening its financial health. The company hired a consultant who highlighted the following two problem areas:

1) Receivables management

2) Total quality management (TQM)

REQUIRED:

Currently customers receive one-month credit, but customers take on average 70 days to pay. Sales revenue amounts to 3.9 million a year and bad debts to 22,000 a year.

The consultant suggests a plan to offer customers a cash discount of 0.5% if they pay within 30 days. He estimates that 50% of customers will take this option and the remaining 50% will continue to wait (on average 80 days). Bad debt is expected to fall to 5,000 if this option is taken. A further reduction in follow-up costs of 7,000 is expected. The cost of capital is 11%.

Advise the company whether this plan is worth implementing. Elaborate your reasons.