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Unformatted text preview: lower price for the product. Accordingly, firms that consider offering a cash discount must perform a benefit–cost analysis to determine whether extending a
cash discount is profitable. CHAPTER 14 TABLE 14.3 Working Capital and Current Assets Management 617 Analysis of Initiating a Cash Discount
for MAX Company Additional profit contribution from sales
[50 units ($3,000 $2,300)] $35,000 Cost of marginal investment in A/Ra
Average investment presently (w/o discount):
$2,300 1,100 units
9 $281,111 Average investment with proposed cash discount:b
$2,300 1,150 units
14.4 183,681 Reduction in accounts receivable investment
Cost savings from reduced investments in
accounts receivable (0.14 $97,430)c
Cost of cash discount (0.02 0.80 1,150 $3,000) Net profit from initiation of proposed cash discount $ 97,430
($ 6,560) aIn analyzing the investment in accounts receivable, we use the variable cost of the product sold
($1,500 raw materials cost $800 production cost $2,300 unit variable cost) instead of the
sale price, because the variable cost is a better indicator of the firm’s investment.
bThe average i...
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