The current credit terms of Brendor Manufacturing Ltd are 2/15, net 45 days. The company’s total annual sales are sh.200 millions with an average collection period of 30 days. Variable costs is 80% of the annual sales. 50% of the customers take advantage of the current discount. The company is considering relaxing its discount terms to 3/15, net 45 days. This relaxation of discount terms is expected to increase by sh.10m, reduce average collection period to 27 days and increase the proportion of customers who will take advantage of the discount to 60%. The company’s cost of capital is 12%. Corporate tax rate is 30%. Assume 360 days in a year. Required: Advise the management of Brendor Manufacturing Ltd on whether to relax its discount terms

The current credit terms of Brendor Manufacturing Ltd are 2/15, net 45 days. The company’s total annual sales are sh.200 millions with an average collection period of 30 days. Variable costs is 80% of the annual sales. 50% of the customers take advantage of the current discount. The company is considering relaxing its discount terms to 3/15, net 45 days. This relaxation of discount terms is expected to increase by sh.10m, reduce average collection period to 27 days and increase the proportion of customers who will take advantage of the discount to 60%. The company’s cost of capital is 12%. Corporate tax rate is 30%. Assume 360 days in a year. Required: Advise the management of Brendor Manufacturing Ltd on whether to relax its discount terms

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 5P

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