The Customers of Canoe Ltd

Multiple Choice

The customers of Canoe Ltd. take 60 days to pay. Canoe's annual sales are $10 million and bad debts are $35,000. To encourage earlier payment, Canoe plans to offer a cash discount of 2% for payment within 20 days. Canoe expects 60% of customers to pay early under the new plan but the remaining customers will take an average of 70 days to pay. Canoe's line of credit charges 15% interest. Bad debts will be reduced by $30,000 and and Canoe can expect to save $10,000 per year in credit administration costs. Should Canoe implement the new credit policy?

A) Yes because it will result in annual savings of $1,096.
B) No because it will result in extra costs of $22,808.
C) Yes because it will result in annual savings of $100,822.
D) No because it will result in extra costs of $38,904.
E) Yes because it will result in annual savings of $2,192.