Torrance Ltd was formed to produce a new type of golf putter. The company sells the putter to wholesalers and retailers and has an annual turnover of £600,000. The following data relate to each putter produced:
£ £
Selling price...............................................36
Variable costs...........................(18)
Fixed cost apportionment...............(6)...........(24)
Net profit....................................................12
The cost of capital (before tax) of Torrance Ltd is estimated at 15 per cent.
Torrance Ltd believes it can expand sales of this new putter by offering customers a longer period in which to pay. The average collection period of the company is currently 30 days. The company is considering three options in order to increase sales. These are as follows:

Torrance Ltd is also reconsidering its policy towards trade creditors. In recent months, the company has suffered from liquidity problems, which it believes can be alleviated by delaying payment to trade creditors. Suppliers offer a 2.5 per cent discount if they are paid within 10 days of the invoice date. If they are not paid within 10 days, suppliers expect the amount to be paid in full within 30 days. Torrance Ltd currently pays suppliers at the end of the 10-day period in order to take advantage of the discounts. However, it is considering delaying payment until either 30 or 45 days after the invoice date.
Required
(a) Prepare calculations to show which credit policy the company should offer its customers.
(b) Discuss the advantages and disadvantages of using trade credit as a source of finance.
(c) Prepare calculations to show the implicit annual interest cost associated with each proposal to delay payment to creditors. Discuss your findings.

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Option 10 20 30 30,000 45,000 50,000