Initiating an early payment discount Gardner Company currently makes all sales on credit and offers...
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Accounting
Initiating an early payment discount
Gardner Company currently makes all sales on credit and offers no discount. The firm is considering offering a 3% discount for payment with a 30 days. The firm's current average collection period is 60 days, sales are 40,000 units per month, selling price is $42 per unit, and variable cost per unit is $34. The firm expects that the change in credit terms will result in an increase in sales to 42,000 units, that 70% of the customers (and 70% of the dollar volume of sales) will take the discount and pay on day 30, and the other customers will continue to pay the full invoice on day 60. The company's cost of capital is 0.5% per month. Should it offer the discount?
(Note: Assume a 365-day year.)
a. The additional profit contribution from additional sales is $? (Round to the nearest dollar.)
b.The amount of cost that will be saved due to the reduction in average A/R is$? (Round to the nearest dollar.)
c. The cost of early payment discount to customer is $? (Round to the nearest dollar.)
d. The net profit from the proposed discount is $?. (Round to the nearest dollar.)
e. Should the proposed discount be offered? (Select the best answer below.)
Yes or No?
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