ABC Ltd has standard trade terms requiring its customers to pay after 30 days. The

average invoice is actually paid after 90 days. A junior executive has suggested that a

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2.5% discount for payment on the 20th day following the invoice date be offered to customers.

It is estimated that 60% of customers will accept this and pay on the 20th day, but 40% will continue to pay, on average, on the 90th day. Sales are Tshs 10 m/= per annum and bad debts are 1% of sales. The company's overdraft facility costs 14% p.a. The reduced collection effort will save Tshs 50,000/= on administration and bad debts will fall to 0.7 % of turnover.

Required:

a) Should the new credit terms be offered to customers?

b) What are the main considerations you would give thought to in setting up a good

credit management system?

c) What are the possible mechanisms (any six) available for controlling the agency

problem? Explain.