ABC Co. is considering giving a 2% cash discount to its customers who pay within 10 days(the firm currently offers no discount). If it institutes this policy, it is likely that the buyers will be able to reduce their cost of goods sold, and buyers who do not take the discount will be using an expensive source of financing.

Question

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Offering a 2% cash discount for early payment incentivizes customers to pay sooner, effectively reducing their cost of goods sold by lowering the total amount paid. Those not taking advantage of the discount end up paying more over time, making it a relatively expensive financing option compared to the discount benefit.

ABC Co Is Considering Giving a 2% Cash Discount to Its