Reference no: EM132822076

Question - Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 % cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 500 films per year, selling price is P 25,000 per film, variable cost per film is P 18,000 per film, and the average cost per film is P 21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 70 % of the sales will take the discount, and the average collection period will drop to 30 days. The bad debt expense is currently 1.5% of sales. Under the proposal, bad debts will decrease to 0.5%. The firm's required return on equal-risk investments is 12%.

Required -

1. What is the firm's marginal profit contribution from sales under the proposed plan of initiating the cash discount?

2. What is the marginal investment in accounts receivable under the proposed plan?

3. What is the cost of marginal investment in accounts receivable under the proposed plan?

4. What are the savings of marginal bad debts under the proposed plan?

5. What is the cost of the marginal cash discount?

6. What is the net result of increasing the cash discount?