Question

Problem 7-24 Credit policy decision with changing variables (L07-4) Dome Metals has credit sales of $108,000 yearly with credit terms of net 60 days, which is also the average collection period. a. Assume the firm offers a 3 percent discount for payment in 15 days and every customer takes advantage of the discount. Also assume the firm uses the cash generated from its reduced receivables to reduce its bank loans which cost 8 percent. What will the net gain or loss be to the firm if this discount is offered? (Use a 360-day year.) Net change in income Loss of

Answer 1

Average Collection Period Before Discount 108000/360*60	$ 18,000.00
Average Collection Period After Discount =108000/360*15	$    4,500.00
Reduction in accounts receivable 18000-4500	$ 13,500.00
Interest saving 13500*.08	$    1,080.00
Discount 108000*.03	$    3,240.00
Net Loss $3240-1080	$    2,160.00