Sakthi Traders has a contribution/sales ration of 20% and average book debts of Rs. 10 lakhs which it collects in an average collection period 24…

Sakthi Traders has a contribution/sales ration of 20% and average book debts of Rs. 10 lakhs which it collects in an average collection period 24 days. The company reorganized its ‘Credit Administration’ department recently and introduction a cash incentive of 5% to speed up collection of outstanding. The incentive is payable to customers making payment within 10 days. When the company reviewed the position after a few months it was found that the average collection period has actually fallen to 20 days only and the average book debts had increased to Rs. 10.50 lakhs mainly as a result of some increase in sales. It was also noticed that only about half the total sales availed of the cash discount. The company’s cost of raising additional funds in 20%. Do you recommend continuance of the cash incentive scheme? Show workings. Assume one year = 360.NOT MY EXPERTISE AREA.

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