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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Discount Policy and Gross Profit

Compton Audio sells MP3 players. During 2019, Compton sold 1,750 units at an average of $225 per unit. Each unit costs Compton $150. At present, Compton offers no sales discounts. Compton’s controller suggests that a generous sales discount policy would increase annual sales to 2,200 units and also improve cash flow. She proposes 5/10, n/30 and believes that 70% of the customers will take advantage of the discount.

Required:

1. If the controller is correct, determine how much the new sales discount policy would add to net sales and gross margin.

2. CONCEPTUAL CONNECTION Explain why the sales discount policy might improve cash flow.

To determine

(a)

Sales discounts:

The term 5/10,n/30 means that if a customer is paying in 10 days then the payment will be after a discount of 5% on the total value but if the customer is paying in 30 days then the payment will be made in full which means no discount.

To calculate:

The addition to the net sales and gross margin due to new discount policy.

Explanation

The Compton Audio sold MP3 players for $3,93,750(1750 units×$225 per unit) and cost of goods of sold is $2,62,500(1750 units×$150 per units) and offered the discount for the payment i.e. if it is received in 10 days and the discount for the early payment is 5%. It is estimated that due to this scheme, the sales will be increased to $4,95,000(2200 units×$225 per unit) and the new cost of goods of sold to $3,30,000(2200 units×$150 per units) and the payment of about 70% customers will be realized in the discount period. This is given in the question.

Increase in the sales revenue=Net Estimated SalesExisting Sales={Sales ValueDiscounts}Existing Sales=${

To determine

(b)

Sales discounts:

The term 5/10,n/30 means that if a customer is paying in 10 days then the payment will be after a discount of 5% on the total value but if the customer is paying in 30 days then the payment will be made in full which means no discount.

To calculate:

The reason of improving the cash flow after providing discount policy.

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