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Dome Metals has credit sales of $324,000 yearly with credit terms of net 90 days, which is also the average collection period
Dome Metals has credit sales of $324,000 yearly with credit terms of net 90 days, which is also the average collection period.
a. Assume the firm offers a 3 percent discount for payment in 15 days, and every customer takes advantage of the discount. Also, assume the firm uses the cash generated from its reduced receivables to reduce its bank loans, which cost 10 percent. What will the net gain or loss be to the firm if this discount is offered? (Use a 360-day year.)
__________________________________________________
|Net change in income |Gain of | |
|Loss of | ______|
b. Should the firm offer a discount?
multiple choice
- No
- Yes
Expert Solution
Computation of Net Gain or Loss be to the firm if this discount is offered:
Given,
Old accounts receivable = $324,000 *90/360 = $81,000
New accounts receivable = $324,000 *15/360= $13,500
Old Accounts Receivable - New Accounts Receivable = Funds Released
Funds released = $81,000 - $13,500 = $67,500
Savings in interest cost ( $67,500 * 10%) = $6,750
Less: Sales discount ( $324,000 * 3 % ) = -$9,720
Increase ( decrease) in Net Income = -$2,970
So, there is a loss of $2,970 if this discount is offered.
b. No, the firm should not offer the discount.
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