Rasheed Trading Company at present offers its customers 40 days credit. Half the customers, by value, pay on time. The other half takes an average of 80 days to pay. The business is considering offering a cash discount of 1 per cent to its customers for payment within 40 days.

The credit controller anticipates that half of the customers who now take an average of 80 days to pay (that is, a quarter of all customers) will pay in 40 days. The other half (the final quarter) will still take an average of 80 days to pay. The scheme will also reduce bad debts by RO 4.2 Million a year.

Annual sales revenue of RO 800 million is made evenly throughout the year. At present the business has a large overdraft (RO 150 million) with its bank at a cost of 10 per cent a year.

Required:

1. (a) Calculate receivables outstanding under both the old and new schemes.

2. (b) How much will the scheme cost the business in discounts?

3. (c) Should the business go ahead with the scheme?

(10 Marks) (5 Marks) (2 Marks)

(d) Suggest Rasheed company to the controls and procedures that a company should

adopt to manage the level of its receivables more efficiently.

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