Accountancy Forum

Good Day all,
My question is as follows
G LTD makes sales on credit and offers no discount.G is considering offering a 2% cash discount for payment within 15days.The current average collection period is 60 days,sales are 40 000units,sellint price is R45 per unit,variable cost per unit is R36.The firms expects that the change in credit terms will result in an increase in sales to 42 000units,that 70% of the sales will take the discount, and that the average collection period will fall to 30days. The firms required rate of return on equal-risk investments is 25%.

Should the proposed discount be offered?

Any one who can assist me in explainint this ,i will appreciate it very much.
Many thanks
Flora

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by hinanifaf</i>
<br />Good Day all,
My question is as follows
G LTD makes sales on credit and offers no discount.G is considering offering a 2% cash discount for payment within 15days.The current average collection period is 60 days,sales are 40 000units,sellint price is R45 per unit,variable cost per unit is R36.The firms expects that the change in credit terms will result in an increase in sales to 42 000units,that 70% of the sales will take the discount, and that the average collection period will fall to 30days. The firms required rate of return on equal-risk investments is 25%.

Should the proposed discount be offered?

Any one who can assist me in explainint this ,i will appreciate it very much.
Many thanks
Flora
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">


Dear Flora,

First, We are required to ascertain whether how much cost will be incurred if discount is given.

Cost of Discount would be 40,000*45*70%*2% = 25,200.
Savings due to Investment in receivables would be = 36,000*

Savings in giving cash discount --------------10,800

Since 10,800 would be extra savings due to reduction in investment in receivables, cash discount must be given to avail the same.

Please let me know, if confusion still exists.

Best Regards,

Faisal.



*Existing average investment in receivable = 40,000*45 / 360*60 = 300,000
Proposed average investment in receivable = (40,000*45)+(2000*36)/360*30 = 156,000.

Reduction in investment in receivables = 144,000
Savings in Reduction in investment in receivables = 144,000*25% = 36,000