Question

An electric company is considering an incentive plan to encourage its customers to pay their bills promptly. The plan is to discount a bill 1% if the customer pays within 10 days, as opposed to the usual 25 days. The managerial question is whether this incentive plan should be adopted or not.

Answer 1

Answer:

No

Explanation:

From the managerial view, they would have to relate it to figures to see if it would be a viable venture or not.

For example: an electricity bill of $100, get a discount of $1 if they pay within 10days.

If you project this further, the discount rate is too small to provide that encouragement for customers to pay within the 10days period that the company proposed.

Answer 2

Answer: The 1% incentive should be adopted

Explanation:

The incentive plan will encourage customers to settle their account early will reduce the risk of Bad debts. Receiving Cash in 10 days instead of the 25 days will be Good for the business because the business will be able pay its creditors and it will improve the business's cash flow cycle. when customers settle their accounts early , the business will be able to pay creditors early which will help the business in negotiating discounts and better payment terms with creditors