Exhibit 27.3
Van Doren housing expects to have sales this year of 15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Van Doren's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Van Doren wants to improve its porfitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is; change the credit terms to 2/10, net 30. The consultants predict that sales would increase by 500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.
-Refer to Exhibit 27.3.What would be the cost to Van Doren of the discounts taken?

Question

Exhibit 27.3
Van Doren housing expects to have sales this year of 15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Van Doren's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Van Doren wants to improve its porfitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is; change the credit terms to 2/10, net 30. The consultants predict that sales would increase by 500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent. 
-Refer to Exhibit 27.3.What would be the cost to Van Doren of the discounts taken?

Quizplus · Accepted Answer

The cost of the discounts taken is calculated as 2% of the sales from customers who take the discount. With sales increasing to $15.5 million and 50% of customers taking the discount, the cost is 0.02 * (0.5 * $15.5 million) = $155,000.

Exhibit 27.3 Van Doren Housing Expects to Have Sales This Year of Year