Answer:
a. Net gain of $693.
b. Yes; If the firm offers a 4 percent discount, it will realize a gain of $693.
Explanation:
a). New sales = 1.10 x $126,000 = $138,600
Increase in profit from new sales = Profit percent x Increase in sales
= 0.30 ×($138,600 - $126,000) = $3,780
Average accounts receivable balance without the discount
= Average collection period x Average daily sales = 90 x ($126,000 / 360) = $31,500
Average accounts receivable balance with the discount
= Average collection period x Average daily sales = 18 x ($138,600 / 360) = $6,930
Reduction in accounts receivable = $31,500 - $6,930 = $24,570
The $24,570 cash inflow from reducing accounts receivable will be used to reduce the firm's loan balance.
Interest savings = Interest rate x Loan reduction = 0.10 x $24,570 = $2,457
Cost of discount = Discount rate x Sales = 0.04 x $138,600 = $5,544
Net gain (loss) = Increase in profit + Interest savings - Cost of discount
= $3,780 + $2,457 - $5,544 = $693
