Dd.114. Initiating a cash discount Gardner Company currently makes all sales on credit and offers no cash discount. Thefirm is considering offering a 3% cash discount for payment within 15 days. The firm's current average collectionperiod is 60 days, sales are 40,000 units, selling price is $44 per unit, and variable cost per unit is $34. The firmexpects that the change in credit terms will result in an increase in sales to 41,000 units, that 70% of the sales willtake the discount, and that the average collection period will fall to 30 days. If the firm's required rate of returnon equal-risk investments is 10%, should the proposed discount be offered? (Note: Assume a 365-day year.). The additional profit contribution from additional sales isThe amount of cost that will be saved due to the reduction in average A/F ISThe cost of extending the cash discount to customer is $The net profit from the proposed cash discount isShould the proposed cash discount be offered? (Select the best answer below.No(Round to the nearest dollar.)(Round to the nearest dollar.)(Round to the nearest dollar.)(Round to the nearest dollar.)

Cash discount are provided by company to increase liquidity by decreasing credit terms.

Answered: "%, should the proposed discount be…

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"%, should the proposed discount be offered? (Not

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 5P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Dd.114.

Initiating a cash discount Gardner Company currently makes all sales on credit and offers no cash discount. The
firm is considering offering a 3% cash discount for payment within 15 days. The firm's current average collection
period is 60 days, sales are 40,000 units, selling price is $44 per unit, and variable cost per unit is $34. The firm
expects that the change in credit terms will result in an increase in sales to 41,000 units, that 70% of the sales will
take the discount, and that the average collection period will fall to 30 days. If the firm's required rate of return
on equal-risk investments is 10%, should the proposed discount be offered? (Note: Assume a 365-day year.).

The additional profit contribution from additional sales is
The amount of cost that will be saved due to the reduction in average A/F IS
The cost of extending the cash discount to customer is $
The net profit from the proposed cash discount is
Should the proposed cash discount be offered? (Select the best answer below.
No
(Round to the nearest dollar.)
(Round to the nearest dollar.)
(Round to the nearest dollar.)
(Round to the nearest dollar.)

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