Question
Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a3% cash discount for payment within 15
Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a3% cash discount for payment within 15 days. The firm's current average collection period is 60 days, sales are 40,000 units, selling price is $47 per unit, and variable cost per unit is $34. The firm expects that the change in credit terms will result in an increase in sales to 43,000 units, that 70% of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm's required rate of return on equal-risk investments is 10%, should the proposed discount be offered?(Note: Assume a 365-day year.)
(a) the additional profit contribution from additional sales is $______
(b) the amount of cost that will be saved due to the reduction in average A/R is $_______
(c) the cost of extending the cash discount to customer is $______
(d) the net profit from the proposed cash discount is $______
Should the proposed cash discount be offered? Yes or No
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