Use the following information on Black Red to answer questions 1 3.

Black Red sells $30 million of its furniture products to wholesalers on credit terms of net 30. Currently, the firms average collection period is 70 days. Black Red is considering offering a 5 percent discount to customers who pay their bills within 5 days. The firm expects 50 percent of its customers to take the discount and its average collection period to decline to 40 days. Black Reds required pretax return on receivables investment is 18 percent.

Determine earned profit on released funds (due to a decrease in Accounts Receivable).

Determine the cost of offering a cash discount.

Determine net effect of offering the cash discount on pretax profit of the firm.