Lowe and Price Co has annual credit sales of $12,000,000, and three months are allowed for payment. The company decides to offer a 2% discount for payments made within ten days of the invoice being sent, and to reduce the maximum time allowed for payment to two months. It is estimated that 50% of customers will take the discount. The company requires a 20% return on investments. Assume that the volume of sales will be unaffected by the discount. What is the reduction in accounts receivable? What is the opportunity income from the reduction in accounts receivable? What is the discount allowed each year? What is the net benefit of new discount policy each year?
Lowe and Price Co has annual credit sales of $12,000,000, and three months are allowed for payment. The company decides to offer a 2% discount for payments made within ten days of the invoice being sent, and to reduce the maximum time allowed for payment to two months. It is estimated that 50% of customers will take the discount. The company requires a 20% return on investments. Assume that the volume of sales will be unaffected by the discount. What is the reduction in accounts receivable? What is the opportunity income from the reduction in accounts receivable? What is the discount allowed each year? What is the net benefit of new discount policy each year?
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 5P
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Lowe and Price Co has annual credit sales of $12,000,000, and three months are allowed for payment. The company decides to offer a 2% discount for payments made within ten days of the invoice being sent, and to reduce the maximum time allowed for payment to two months. It is estimated that 50% of customers will take the discount. The company requires a 20% return on investments. Assume that the volume of sales will be unaffected by the discount.
What is the reduction in accounts receivable?
What is the opportunity income from the reduction in accounts receivable?
What is the discount allowed each year?
What is the net benefit of new discount policy each year?
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