Hunter plc requires advice on its debt collection policy. Its directors are considering two options for reducing bad debts and shortening the period of credit extended to its debtors. The current situation is as follows: Current policy Sales Annual expenditure on debt collection procedures £4,800,000 £180,000 Bad debt losses (% of sales) 2% Average collection period 120 days Cost of financing debtors 10% pa Option 1 involves offering a 2% discount for prompt payment. It is expected that this will not affect the level of sales but that half of the sales each year would be made at a 2% discount adding an extra £48,000 to the current annual expenditure on debt collection procedures. The positive effects of this option would be to reduce bad debts by 0.5% and reduce the average collection period by 30 days. Option 2 is to expand the credit control department to enable it to chase debts more effectively. This would increase annual costs by£100,000, reduce bad debts by 1% and reduce average collection period by 60 days. Should the current policy be discarded in favour of option 1 or option 2?
Hunter plc requires advice on its debt collection policy. Its directors are
considering two options for reducing
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Current policy |
|
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Sales Annual expenditure on debt collection procedures |
£4,800,000 £180,000 |
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Bad debt losses (% of sales) |
2% |
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Average collection period |
120 days |
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|
Cost of financing debtors 10% pa
Option 1 involves offering a 2% discount for prompt payment. It is expected that this will not affect the level of sales but that half of the sales each year would be made at a 2% discount adding an extra £48,000 to the current annual expenditure on debt collection procedures. The positive effects of this option would be to reduce bad debts by 0.5% and reduce the average collection period by 30 days.
Option 2 is to expand the credit control department to enable it to chase debts more effectively. This would increase annual costs by£100,000, reduce bad debts by 1% and reduce average collection period by 60 days.
Should the current policy be discarded in favour of option 1 or option 2?
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