Yellow Pear plc has sales of £10m per annum. It usually requires its customers to pay at the 20th day. However, on average, its customers pay on the 80th day after the invoice is made. A manager has suggested that a 2.0% discount of the goods can be applied for those customers who pay on the 10th day after the invoice is offered to the customers. He expects that 70% of customers will be attracted to this idea and pay on the 10th day. And this will reduce the company’s effort in chasing up the payment from its customers and save £60,000 per annum on administration. But it will also INCREASE the amount of bad debt from the original level of 0.8% of sales to 1% of sales. The other 30% of customers will continue to pay (on average) on the 80th day. The company’s overdraft facility costs 15% per annum. Required: (a) Please evaluate the suggestion of the manager and decide whether his suggestion should be accepted.  (b) Please evaluate the following statement: taking a long time to pay suppliers’ invoice is always a cheap form of finance. 

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a The managers suggestion should not be accepted Although offering a 20 discount may attr... View the full answer