Question

Aaron's Gummi Factory is taking off. Due to American's poor diet, people are buying gummi candies like they won't ever exist again. Aaron's Gummi Factory has the following data points:

Annual total sales = $44,000,000

Annual credit sales = $37,000,000

Credit terms = net 30

Average collection period = 45 days

Aaron is tired of dealing with an average collection period of 45 days and wants to reduce it some. He is considering adjusting terms to 1/10 net 30. Not all the customers will take the discount but it is reasonable to assume that 35% of the customers will. If all goes to plan, the average collection period will drop by 12 days.

After concluding your analysis, should Aaron offer the discount? Assuming that the company's required rate of return on receivables is 14%.

Options:

No. It doesn't make sense because his pretax profits will decline by around $41,000.

Yes. It does maek sense because his pretax profits will increase by around $54,000.

No. It doesn't make sense because his pretax profits will decline by around $88,000.

Yes. It does make sense because his pretax profits will increase by around $41,000.

Answer 1