Question
Three companies have adopted different approaches to extending credit facilities to their customers as follows: Company A does not give any credit whatsoever and requires
Three companies have adopted different approaches to extending credit facilities to their customers as follows:
Company A does not give any credit whatsoever and requires payment on delivery (cash on delivery), for which it offers a 1% discount. Company B offers a 30-day credit period and receives payments on time, while Company C offers the same 30-day credit terms, but its customers normally take 90 days to pay. However, Company C charges interest of 12% per annum on late payments.
All three companies have annual sales of 60,000 and a net profit margin (before credit costs) of 5%.
The companies finance their operations with money from their overdraft facility at a cost of 12% per annum.
You are required to:
- Calculate the net profit for each company.
- Calculate a revised profit figure for Company A, if it does not offer any prompt payment discount.
- Calculate a revised profit figure for Company C, if it stops charging its customers interest on their late payments.
- Comment on your results (original and revised profit) explaining the preferred company.
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