Reference no: EM133110994

Fred Davis is a finance director of a large industrial products firm that offers a 2% discount for payment within 10 days. The average collection period is 28 days and 30% of his customers take the discount. He contends that the discount should be dropped contending that the average collection would only increase to 30 days saving 3% on all accounts taking the discount. However, the marketing manager estimates that sales would drop from 21,000 to 20,000 units. The firm has a 20% required rate of return and if the selling price is $22 per unit with the average cost per unit at current sales volume and the variable cost is $17 per unit, should the firm discontinue the discount?