Lipto Biomedic has credit sales of $740,000 yearly with credit terms of net 60 days, with an average collection period of 75 days. Lip to does not offer a discount for early payment.
a. What is the average receivables balance? What is the receivables turnover?
b. If Lipto offered a 3 percent discount for payment in 10 days and every customer took advantage of the new terms and paid on the tenth day, what would the new average receivables balance be? Use the full sales of $740,000 for your calculation of receivables.
c. If Lip to reduces its bank loans, which cost 8 percent, by the cash generated from reduced receivables, what will be the net gain or loss to the firm? Should it offer the discount?
d. Assume the new trade terms of 2/10, net 30 will increase sales by 12 percent because the discount makes Lip to price competitive. If Lip to earns 19 percent on sales before discounts, should it offer the discount?