Textbook Problem

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.