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Nevergreen's standard terms on sales invoices are 30 days, but analysis has shown that on average customers pay on 45 days. Total sales revenue
Nevergreen's standard terms on sales invoices are 30 days, but analysis has shown that on average customers pay on 45 days. Total sales revenue is 10,000,000 and the company expects irrecoverable receivables of 200,000. A suggestion has been made to offer a 5% discount to customers paying when ordering (i.e. O days). It is expected that 20% of customers will take advantage of this. Irrecoverable receivables would be expected to fall to 100,000 and administrative savings on credit control would amount to 50,000. The average number of days to pay for the remaining 80% of customers would be expected to increase to 50 days. Nevergreen finances its working capital with a bank overdraft that costs 6% per annum. a) Based on the information provided should the suggested 5% discount be offered?
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