Question

Your company currently sells its product with a 3% discount to customers who pay cash immediately. Otherwise the full price is due within 30 days. Half of your customers take advantage of the discount. You are considering dropping the discount so that your new terms would just be net 30. If you do that, you expect to lose some customers who were only willing to pay the discounted price, but the rest will simply switch to taking the full 30 days to pay . Altogether, you estimate that you will sell 40 fewer units per month (compared to 500 units currently). Your variable cost per unit is $60 and your price per unit is $100. If your required return is 1% per month, what is the change in value after you switch to the new credit policy

Answer 1

Particulars		Base		With 3% Discount	Without 3% Discount
Units Sold		Units		500	460
Sales Price		Per unit		$                 100.00	$                       100.00
Less:- Variable Cost		Per unit		$                   60.00	$                        60.00
Less:- Discount		Per unit		$                     3.00	$                             -
Contribution		Per unit		$                   37.00	$                        40.00
Total Contribution		Units * Cont/unit		$             18,500.00	$                  18,400.00
Hold Amount				$             25,000.00	$                  46,000.00
				= 100*500*50%	= 460*100
Return @ 1%				250	460
Change in Value
Contribution Lost = 18,500 - 18,400 = $ 100/-
Increase in Cost of hold amount = 460 - 250     = $ 210/-
Value of change = 100 + 210 = $ 310/-