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Schubert Ltd. has annual sales of 14.6 million which occur evenly throughout the year. The company allows its customers 30 days credit from the date of invoice, and all sales are on credit. The companys average variable cost ratio (i.e. incremental or variable costs as a percentage of sales) is 70% at the present time. Recent experience has shown that debtors representing half of the company's sales pay within the allowed credit period, taking an average of 24 days to pay, while the remaining debtors take an average of 50 days to settle their accounts. The Finance Director of Schubert is considering offering a cash discount of 1% to its customers for accounts settled within 10 days of the invoice date. She expects that the introduction of the discount scheme will have the following effects: 80% of the debtors (by value) who at present settle their accounts within the 30 day credit period are expected to take advantage of the discount by paying on the 10th day, and the remaining 20% of this group will, on average, pay on the 28th day. Half of the customers (by value) who presently take an average of 50 days to pay will also avail of the discount by settling their accounts on the 10th day, while the other half will take an average of 60 days to pay the amounts due. The discount scheme should also have the effect of reducing the present level of bad debts by 30,000 per year. The availability of the cash discount should attract new customers planning to pay on the 10th day, thereby reducing the cost of their purchases by the value of the discount. It is conservatively estimated that 365,000 per year in additional sales should be achieved from this source. The cost of the companys bank borrowings is 10% per year at the present time. Required: (a) Prepare an analysis of the expected costs and benefits of the proposed discount scheme, and prepare an overall recommendation for the Finance Director of Schubert Ltd. (Note: Assume a 365-day year in all calculations). (12 Marks) (b) Schuberts Finance Director is also considering entering into a debt-factoring arrangement with National Factors plc. Explain how a debt-factoring arrangement could operate, and outline the advantages and disadvantages of such an arrangement for Schubert Ltd.

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