Gelmite & Sons Hardware is considering introducing a cash discount policy to its customers so as to

improve current sales. There are three possible scenarios that include monthly estimates. Gelmite

& Sons uses a 60% mark up on cost on all their products as a general rule. Fixed costs are R8 000

per month.

Scenario A: Representing the Current Scenario

Company sold 600 units of the spark nail which they ordered at a wholesaler in Shoppers Town for

a cost price of R100 each.

Scenario B: Representing initial sales target

Company will sell 800 units of the spark nail which they ordered at a wholesaler in Shoppers Town

for a cost price of R100 each.

These sales units are achieved after the introduction of a 20% markdown on the original selling

price.

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The Independent Institute of Education (Pty) Ltd 2020

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Scenario C: Representing a scenario where sales targets are surpassed

Company will sell 1 000 units of the spark nail which they ordered at a wholesaler in Shoppers Town

for a cost price of R100 each. In order to achieve the increased sales, additional marketing costs of

R3 000 will be incurred.

These sales units are achieved after the introduction of a 20% markdown from original selling price.

Required:

Which of the three scenarios would you recommend to management? Provide a reason for your

answer with reference to net profit before tax.