King Company presents the following information: a) Annual credit sales: P 25,200,000 b) Collection period: 3 months c) Rate of return: 12% King company considers changing its credit term from n/30 to 3/10, 1/30

Finance Jun 06, 2021

King Company presents the following information:

a) Annual credit sales: P 25,200,000

b) Collection period: 3 months

c) Rate of return: 12%

King company considers changing its credit term from n/30 to 3/10, 1/30. The following are expected to result: (1) 30% of its customers will take advantage of the discount; (2) sales will remain constant, (3) the collection period is expected to decrease to two months

REQUIRED: What is the net advantage (disadvantage) of implementing the proposed discount policy?

Expert Solution

Computation of Net Advantage (disadvantage) of implementing the proposed discount policy:

Incremental discount (2520000030%3%)	226,800
Decrease in Average Receivables (25200000*1 month/12 months)		2,100,000
Interest Saved (2100000*12%)	252,000
Net advantage if the proposed discount policy is implemented (252,000-226,800)	$ 25,200

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