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PNP Plc (June 07 – Modified)

The following financial information relates to PNP plc, for the year just ended.



Sales revenue


Variable cost of sales








Segmental analysis of receivables



Average payment period



Class 1


30 days



Class 2


60 days



Class 3


75 days





90 days








The receivables balances given are before taking account of irrecoverable debts. All sales are on credit. Production and sales take place evenly throughout the year. Current sales for each class of receivables are in proportion to their relative year-end balances before irrecoverable debts.

It has been proposed that the discount for early payment be increased from 1.0% to 1.5% for settlement within 30 days.

It is expected that this will lead to 50% of existing Class 2 receivables becoming Class 1 receivables, as well as attracting new business worth £500,000 in revenue. The new business would be divided equally between Class 1 and Class 2 receivables. Fixed costs would not increase as a result of introducing the discount or by attracting new business. PNP finances receivables from an overdraft at an annual interest rate of 8%.


A. Calculate the net benefit or cost of increasing the discount for early payment and comment on the acceptability of the proposal.
B. Calculate the current cash operating cycle and the revised cash operating cycle caused by increasing the discount for early payment.
C. Identify and explain the key elements of a receivables management system suitable for PNP plc.

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