Initiating a cash discount Gardner Company currently makes all sales on credit a
ID: 2416634 • Letter: I
Question
Initiating a cash discount Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2% 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 $45 per unit, and variable cost per unit is S36. The firm expects that the change in credit terms will result in an increase in sales to 42,000 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 25%, should the proposed discount be offered? The additional profit contribution from additional sales is $ (Round to the nearest dollar.)Explanation / Answer
Sales unit
40000
42000
Selling price
45
45
Variable cost
36
36
Contribution
9
9
Contribution in $
360000
378000
Less- discount
5292
Less- risk on investment
792
Net contribution
360000
371916
risk= [40000 *60/360 – 42000 * 30/360]*25%
= 792
The additional profit contribution from additional sales = 11916
Sales unit
40000
42000
Selling price
45
45
Variable cost
36
36
Contribution
9
9
Contribution in $
360000
378000
Less- discount
5292
Less- risk on investment
792
Net contribution
360000
371916