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Learning objectives:
This assignment will enable students:
 To understand the importance of debtor management as component of working
capital
 To analyze different debtor management techniques for efficient working capital
management
Learning outcome:
After attempting this assignment students will learn:
How to evaluate different debtor management options
Case:
Lunear Manufacturers are leading manufacturers’ of Tyre & Tubes in the industry; they
have achieved a position of market leaders by maintaining a larger share of profit in the
industry. Many company specific factors contribute to their success and one of them is
efficient working capital management. Currently they are facing some debtor
management issues for which management is considering two options either to manage
debtors itself by offering “Discounts “or to hire the services of “Factor”. You have to
evaluate both options for the company if company intends to reduce average collection
period (ACP). Current sales level for company is Rs.15 Million with an average
collection period (ACP) of 60 days. Company is deciding to reduce its collection period
from 60 days to 40 days. Company can avail short term loan to meet liquidity needs at
15%. Following is the information about two options:


Option #01 (Offering Discount to shorten ACP)
Company plans to offer 3% discount for the customers who pay within 10 days, it has
been estimated that only 40% customers will avail this opportunity.


Option #02 (Using Factor services to shorten ACP)
By hiring services of “Factor”, company can save Rs. 30,000 per year on account of
debtors management and collection cost whereas ACP will also reduced to 40 days at
cost of 3% of sales. Factor will charge 12% for providing 75% of invoice value of sales
whereas rest the payment will be made after 40 days.


Required:
1. Evaluate both options in terms of “Net saving” for the company. 18 (9+9) Marks
2. Comment on the net saving of both options and suggest which option is more
suitable for company to meet its intended objective and why? 2 Marks
NOTE: Working and Formulas are mandatory as they carry marks.

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