Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 2 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are currently $1,000,000, variable cost is $600,000 (note the variable cost % is 60%). The firm expects that the change in credit terms will result in an increase in sales to $1,500,000 per year and variable costs will increase to $900,000 per year. Fizzy projects that 80 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's required return on equal-risk investments is 10 percent. (Assume a 360-day year.) What is the cost (benefit) of the marginal cash discount? O ($18,000) $24,000 ($22,000) O $30,000
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 2 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are currently $1,000,000, variable cost is $600,000 (note the variable cost % is 60%). The firm expects that the change in credit terms will result in an increase in sales to $1,500,000 per year and variable costs will increase to $900,000 per year. Fizzy projects that 80 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's required return on equal-risk investments is 10 percent. (Assume a 360-day year.) What is the cost (benefit) of the marginal cash discount? O ($18,000) $24,000 ($22,000) O $30,000
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 5P
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