Gardner Company currently makes all sales on credit and offers no cash discount.

Question

Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering a 2% cash discount for payment within 15 days The firm's current average collection Penrod is 60 days, sales are 40.000 units, selling price is $45 per unit and van able cost per unit is $36 The Arm expects that offering a cash discount will result in an increase in sales to 42.000 units, that 80% of the sales will take the discount and that the average collect on period will fall to 30 days. The firms required rate of return on equal-risk investment is 25%. (Using a 360-day year to calculate your answer) What is the cost of the cash discount and what is the saving from the reduction in investment in accounts receivable under the proposed change. $28,151. $240, 000 $26,460. $126,000 $18,000. $240, 000 $25,200. $28,500 $30,240. $28,500

Explanation / Answer

Current sales = 40000*45 i.e 1800000

Proposed sales = 42000*45 i.e 1890000

Discout alowed= 1890000*0.80*2% i.e 30240

Current accounts receivable = 1800000/360*30 i.e 300000

Proposed accouts receivable = 1890000*0.80/360*30 i.e 126000

Blockage released = 300000-126000 i.e 174000

E. 30240 & 28500

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