Warren Motor Company sells $30 million of its products to wholesalers on terms of "net 30." Currently, the firm's average collection period is 48 days.In an effort to speed up the collection of receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills within 10 days.The firm expects 50 percent of its customers to take the discount and its average collection period to decline to 30 days.The firm's required pretax return (i.e., opportunity cost) on receivables investment is 16 percent.Determine the cost of the cash discounts to Warren.
A)$300,000
B)$60,000
C)$40,000
D)$48,000

Question

Quizplus · Accepted Answer

Cost of cash discounts = $30,000,000 × 0.50 × 0.02 = $300,000

Warren Motor Company Sells $30 Million of Its Products to Wholesalers