A company currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 12 days. The firms current average collection period is 40 days, sales are 45000 units per year, selling price is $28 per unit, and variable cost is $20 per unit. The firm expects that the change in credit terms will result in an increase in sales of 15,000 units per year and that 70% of the sales will take the cash discount, and the average collection period will drop to 30 days. The firms bad debt expense is expected to have no change under the proposed plan. The firms required return on equal-risk investments is 18%. (Year = 360 days)

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1) What is the firms additional profit contribution from sales under the proposed plan of initiating the cash discount?

$

2) The total variable cost of annual sales under the present (without discount):

$

3) Turnover of accounts receivable under present plan (without discount):

4) Average investment in accounts receivable under present plan (without discount):

$

5) The total variable cost of annual sales under the proposed (with discount):

$

6) Turnover of accounts receivable under proposed plan (with discount):

7) Average investment with proposed cash discount:

$

8) Reduction in accounts receivable investment

$

9) Cost savings from reduced investment in accounts receivable

$

10) Cost of cash discount

$

11) Net profit or loss from implementing the proposed cash discount

10-

$

12) Should the firm implement the cash discount?

1 0

$