Until recently, Augean Cleaning Products sold its products on terms of net 60, with an average collection period of 75 days. In an attempt to induce customers to pay more promptly, it has changed its terms to 2/10, EOM, net 60. The initial effect of the changed terms is as follows:

Average Collection Periods, Days Percent of Sales with Cash Discount Cash Discount Net 60 30* 80

* Some customers deduct the cash discount even though they pay after the specified date.

Calculate the effect of the changed terms. Assume

• Sales volume is unchanged.

• The interest rate is 12%.

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• There are no defaults.

• Cost of goods sold is 80% of sales.

AppendixLO1