Throughout the late 1980s major U.S. retailers, such as Sears and J.C. Penney, reported only slight gains in sales. An analyst for this industry said that “consumers are stretched with debt,” indicating that they were unwilling to increase their current levels of debt. In an effort to increase sales, some of the retailers considered offering cash discounts for customers who pay cash immediately or within a very short period of time (e.g., ten days). REQUIRED:

a. Most large retail companies currently assess no finance charge for outstanding accounts of less than thirty days. Suppose that a company, such as Sears, changed its credit policy and began granting cash discounts with terms of 2/10, n/30. Would such a policy neces¬ sarily increase sales volume? Why or why not? What would happen, for example, if the cash discount rate were set too high?

b. Assume that you purchased merchandise from Sears on account with a gross price of $500 under terms of 2/10, n/30. If you paid your account in ten days, how much would you have to pay? If you paid your account in twenty days, how much would you pay, and at what annual rate of interest would you be paying? If you paid your account in thirty days, how much would you pay, and at what annual rate of interest would you be paying?