Dome Metals has credit sales of $504,000 yearly with credit terms of net 60 days

Question

Dome Metals has credit sales of $504,000 yearly with credit terms of net 60 days, which is also the average collection period. (a) If Dome offered a 5 percent discount for payment in 18 days and every customer took advantage of the new terms and reduces its bank loans, which cost 10 percent, by the cash generated from its reduced receivables, what will be the net gain or loss to the firm? (Input the amount as positive value. Omit the "$" sign in your response.) Net change in income $ (b) Should it offer the discount? Yes No

Explanation / Answer

Average Daily sales =Sales/360 days =$504,000/360 =$1400
Accounts Receivable balance =$1400*60 =$84,000
Receivable turnover =sales/Receivables =$504,000/84,000 =6
New Receivable Balance =$1400*18 =$11,200
Funds freed by discount =old receivables-new receivables with discount
=84000-11200 =$72,800
Savings on loan =10%*$72,800= $7,280
Discount on sales = 5%*504,000=$25,200
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Net change in income from =$17,920
discount
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No ,don't offer the discount since the income from reduced bank loans does not offset the loss on the discount.

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