Question
Hendry Corporation, with sales of $1,800,000, is considering eliminating its sales discount by changing its terms from 2/10 net 30 to net 35. Currently, only
Hendry Corporation, with sales of $1,800,000, is considering eliminating its sales discount by changing its terms from "2/10 net 30" to "net 35." Currently, only 20% of the customers take the discount and pay on day 10; the remainder pay on day 40 on average. The company forecasts that sales would not change, however, after the change customers would pay on day 45 on average. The company also forecasts that the change would increase idle cash balances by $2,000 but reduce the cost of administering its accounts receivable by $5,000. Hendry's variable costs are 70% of sales, its tax rate is 30%, and it has a 12% cost of capital.
Should Hendry eliminate the discount?
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