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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

Parker Electronics sells cell phones. During 2019, Parker sold 1,500 units at an average of $500 per unit. Each unit cost Parker $350. At present, Parker offers no sales discounts. Parker’s controller suggests that a generous sales discount policy would increase annual sales to 2,000 units and also improve cash flow. She proposes 3/15, n/20 and believes that 75% 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 3/15,n/20 means that if a customer is paying in 15 days then the payment will be after a discount of 3% on the total value but if the customer is paying in 20 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 Parker Electronics sold cell phones for $7,50,000(1500 units×$500 per unit) and cost of goods of sold is $5,25,000(1500 units×$350 per units) and offered the discount for the payment i.e. if it is received in 15 days and the discount for the early payment is 3%. It is estimated that due to this scheme, the sales will be increased to $10,00,000(2000 units×$500 per unit) and the new cost of goods of sold to $7,00,000(2000 units×$350 per units) and the payment of about 75% 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=${10

To determine

(b)

Sales discounts:

The term 3/15,n/20 means that if a customer is paying in 15 days then the payment will be after a discount of 3% on the total value but if the customer is paying in 20 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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