Working Capital Management

The information below applies to the next three questions.(Questions 3, 4 and 5)

Crystals. currently makes all sales on credit and offers no cash discount. The firm is considering a 3% cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 art pieces per year, selling price is R 25 000 per art piece, variable cost per item is R 18750, and the average cost per item is R 21 000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 items per year that 75% of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5% of sales. The firm's required return on equal-risk investments is 20%. (Assume a 360-day year).

QUESTION 3 What is the firms marginal profit contribution under the proposed plan? 1) R 22 500 2) R 40 000 3) R 62 500 4) R100 000

QUESTION 4 What is the cost of marginal investment in accounts receivable under the proposed plan? 1) R 246 875 2) R 276 500 3) R 313 460 4) R368 314

QUESTION 5 What are the savings of marginal bad debts under the proposed plan? 1) R 500 000 2) R 50 000 3) R 10 000 4) R 5 000