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credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000
units during the coming year; the average collection period is expected to
increase from 45 to 60 days; and bad debts are expected to increase from 1% to
3% of sales. The sale price per unit is $40, and the variable cost per unit is $31.
The firm’s required return on equal-risk investments is 25%. Evaluate the proposed relaxation, and make a recommendation to the firm. LG5 14–10 Initiating a cash discount Gardner Company currently makes all sales on credit
and offers no cash discount. The firm is considering offering a 2% cash discount
for payment within 15 days. The firm’s current average collection period is 60
days, sales are 40,000 units, selling price is $45 per unit, and variable cost per unit
is $36. The firm expects that the change in credit terms will result in an increase in
sales to 42,000 units, that 70% of the sales will take the discount, and that the
average collection period will fall to 30 days. I...
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