Dome Metals has credit sales of $414,000 yearly with credit terms of net 60 days

Question

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 price competitive. a. If Dome earns 25 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.) b. Should the firm offer the discount? Yes No

Explanation / Answer

.a. Amt lost in Accounts receivables = ($414,000)4% = $16,560 Interest gain on the proceeds for 50 (60-10)days = ($414,000 - $16,560) x 10%(assuning per annum) x 50/365 = $3,97,440 x 10% x 50/365 = $5444.38 Hence,Net loss on 4% discount for payment in 10 days =$16,560-$5444.38 =$11,115.62 b.Yes

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