Casey Ltd sells branded jackets, supplies on a wholesale basis and has an annual turnover of $8,450,560. The company employs 2 people in its sales ledger and credit control department at an annual salary of $20,000 each. All sales are on 30 days' credit with no discount for early payment. Bad debts represent 1% of tumover and Casey Ltd pays annual interest of 8% on its overdraft. The most recent accounts of the company offer the following financial information: Statement of Financial Position as at 31 May 2020 so00 so0 25,600 Assets Non-Current assets Current assets Inventory of goods for resale Trade Receivables Cash 1,950 545 200 2.695 28,295 Total Assets Capital and Liabilities Ordinary shares Reserves 5,000 17.795 22,795 Non-Current Liabilities 10% debentures due 2010 1,000 Current Liabilities Trade payables Overdraft 2,000 2,500 Total Liabilities 6.600 28,295 Casey Ltd is considering offering a discount of 2.7% to customers paying within 10 days, which it believes will reduce bad debts to 0.8% of turnover. The company also expects that offering a discount for early payment will reduce the average credit period taken by its customers to 20 days. The consequent reduction in the time spent chasing customers where payments are overdue will allow one member of the credit control team to take early retirement. One-fifth of customers are expected to take advantage of the discount. Required Using the information provided, determine whether a discount for early payment of 2.7% will lead to an increase in profitability for Casey Ltd.
Casey Ltd sells branded jackets, supplies on a wholesale basis and has an annual turnover of $8,450,560. The company employs 2 people in its sales ledger and credit control department at an annual salary of $20,000 each. All sales are on 30 days' credit with no discount for early payment. Bad debts represent 1% of tumover and Casey Ltd pays annual interest of 8% on its overdraft. The most recent accounts of the company offer the following financial information: Statement of Financial Position as at 31 May 2020 so00 so0 25,600 Assets Non-Current assets Current assets Inventory of goods for resale Trade Receivables Cash 1,950 545 200 2.695 28,295 Total Assets Capital and Liabilities Ordinary shares Reserves 5,000 17.795 22,795 Non-Current Liabilities 10% debentures due 2010 1,000 Current Liabilities Trade payables Overdraft 2,000 2,500 Total Liabilities 6.600 28,295 Casey Ltd is considering offering a discount of 2.7% to customers paying within 10 days, which it believes will reduce bad debts to 0.8% of turnover. The company also expects that offering a discount for early payment will reduce the average credit period taken by its customers to 20 days. The consequent reduction in the time spent chasing customers where payments are overdue will allow one member of the credit control team to take early retirement. One-fifth of customers are expected to take advantage of the discount. Required Using the information provided, determine whether a discount for early payment of 2.7% will lead to an increase in profitability for Casey Ltd.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter21: Supply Chains And Working Capital Management
Section: Chapter Questions
Problem 6P
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Transcribed Image Text:Casey Ltd sells branded jackets, supplies on a wholesale basis and has an annual turnover
of $8,450,560. The company employs 2 people in its sales ledger and credit control
department at an annual salary of $20,000 each.
All sales are on 30 days' credit with no discount for early payment. Bad debts represent 1% of
turnover and Casey Ltd pays annual interest of 8% on its overdraft. The most recent accounts
of the company offer the following financial information:
Statement of Financial Position as at 31 May 2020
Assets
Non-Current assets
$000 $000
25,600
Current assets
Inventory of goods for resale
Trade Receivables
1,950
545
Cash
200
2.695
28,295
Total Assets
Capital and Liabilities
Ordinary shares
Reserves
5,000
17.795
22,795
Non-Current Liabilities
10% debentures due 2010
1,000
Current Liabilities
Trade payables
Overdraft
2,000
2,500
Total Liabilities
6,600
28,295
Casey Ltd is considering offering a discount of 2.7% to customers paying within 10 days,
which it believes will reduce bad debts to 0.8% of turnover. The company also expects that
offering a discount for early payment will reduce the average credit period taken by its
customers to 20 days. The consequent reduction in the time spent chasing customers where
payments are overdue will allow one member of the credit control team to take early
retirement.
On-fifth of customers are expected to take advantage of the discount.
Required
Using the information provided, determine whether a discount for early payment of 2.7% will
lead to an increase in profitability for Casey Ltd.
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