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 dales 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 profitability, 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

Quizplus · Accepted Answer

The cost of 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