Question

Dome Metals has credit sales of $396,000 yearly with credit terms of net 45 days, which is also the average collection period. a. Assume the firm offers a 3 percent discount for payment in 18 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.) b. Should the firm offer the discount? No Yes

Answer #1

Average accounts receivable without discount = Average collection period X Average daily sales |

= 45 X (396000/360) |

= $ 49,500 |

Average accounts receivable with discount = Average collection period X Average daily sales |

= 18 X (396000/360) |

= $ 19,800 |

Reduction in accounts receivable = $49,500- $19,800 |

=$29,700 |

Reduction in accounts receivable leads to reduction in bank loan |

Interest savings = $29,700 X 10% = $2,970 |

Discount on sales = Sales x Discount rate |

= 396,000 X 3% = $11,880 |

Net gain (loss) to the firm if this discount is offered |

= $2970-$11,800 |

= ($8,910) |

No, Firm should not offer the discount. |

Dome Metals has credit sales of $396,000 yearly with credit
terms of net 45 days, which is also the average collection period.
Assume the firm adopts new credit terms of 3/18, net 45 and all
customers pay on the last day of the discount period. Any reduction
in accounts receivable will be used to reduce the firm's bank loan
which costs 10 percent. The new credit terms will increase sales by
15% because the 3% discount will make the firm's...

Dome Metals has credit sales of $396,000 yearly with credit
terms of net 45 days, which is also the average collection period.
Assume the firm adopts new credit terms of 3/18, net 45 and all
customers pay on the last day of the discount period. Any reduction
in accounts receivable will be used to reduce the firm's bank loan
which costs 10 percent. The new credit terms will increase sales by
15% because the 3% discount will make the firm's...

Dome Metals has credit sales of $504,000 yearly with credit
terms of net 60 days, which is also the average collection period.
Assume the firm adopts new credit terms of 3/18, net 60 and all
customers pay on the last day of the discount period. Any reduction
in accounts receivable will be used to reduce the firm's bank loan
which costs 10 percent. The new credit terms will increase sales by
15% because the 3% discount will make the firm's...

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Assume the firm adopts new credit terms of 3/18, net 120 and all
customers pay on the last day of the discount period. Any reduction
in accounts receivable will be used to reduce the firm's bank loan
which costs 10 percent. The new credit terms will increase sales by
15% because the 3% discount will make the firm's...

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Assume the firm adopts new credit terms of 2/15, net 90 and all
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Assume the firm adopts new credit terms of 2/18, net 30 and all
customers pay on the last day of the discount period. Any reduction
in accounts recevable will be used to reduce the firm's bank loan
which costs 10 percent The new credit terms will increase sales by
10% because he 2% discount will make the firm's...

Dome Metals has credit sales of $414,000 yearly with credit
terms of net 60 days, which is also the average collection period.
Assume the firm adopts new credit terms of 4/10, net 60 and all
customers pay on the last day of the discount period. Any reduction
in accounts receivable will be used to reduce the firm's bank loan
which costs 10 percent. The new credit terms will increase sales by
20% because the 4% discount will make the firm's...

A firm has credit sales of 144,000 yearly with credit terms 30
days that is also the average collection period and no discount for
early payment. Now it considers new trade terms of 2/10 net 30
days.
What would be the incremental decrease in account receivables if
the new trade terms are accepted by all customers?

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Item 20 2 points
Dome Metals has credit sales of $486,000 yearly with credit
terms of net 90 days, which is also the average collection period.
Assume the firm adopts new credit terms of 4/15, net 90 and all
customers pay on the last day of the discount period. Any reduction
in accounts receivable will be used to reduce the firm's bank loan
which costs 12 percent....

The Danu Ltd is considering to introduce a cash discount. The
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It is expected that 50% of customers will take the advantage of the
changed credit terms. Danu’s annual sales are Rs. 8,000,000 and
required rate of return is 13%. Assume corporate tax rate...

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