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Fred Davis is a finance director of a large industrial products firm that offers a 2% discount for payment within 10days . The average collection period is 28 days and 30% of his customers take the discount He contends that the discount should be dropped contending that the average collection would only increase to 30 days saving 3% on all accounts taking the discount . However , the marketing manager estimates that sales would drop from 21,000 to 20, 000units . The firm has a 20 % required rate of return and if the selling price is $22 per unit with the average cost per unit at current sales volume and the variable cost is $17 per unit, should the firm discontinue the discount ?

(i) Fred Davis is a finance director of a large industrial products firm that offers a 2% discount for payment within 10days. The average collection period is 28 days and 30% of his customers take the discount. He contends that the discount should be dropped contending that the average collection would only increase to 30 days saving 3% on all accounts taking the discount. However, the marketing manager estimates that sales would drop from 21,000 to 20,000 units. The firm has a 20% required rate of return and if the selling price is $22 per unit with the average cost per unit at current sales volume and the variable cost is $17 per unit, should the firm discontinue the discount? 20 marks 1

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