Reference no: EM132566276

Rahim Bersekutu currently makes all sales on credit and offers no cash discount. The firm is considering a 4 percent cash discount for payment within 12 days. The firm's current average collection period is 60 days, sales are 350 machines per year, selling price is RM40,000 per machine, variable cost per machine is RM30,000, and the average cost per film is RM33,000.

The company expects that the change in credit terms will result in a minor increase in sales of 20 machines per year, that 80 percent of the sales will take the discount, and the average collection period will drop to 45 days.

The firm's bad debt expense is expected to become 2 percent under the proposed plan. The bad debt expense is currently 1 percent of sales. The firm's required return on equal-risk investments is 15 percent. (Assume a 360-day year.)

Question i) What is the firm's marginal profit contribution from sales under the proposed plan of initiating the cash discount?

Question ii) What is the marginal investment in accounts receivable under the proposed plan?

Question iii) What is the cost of marginal investment in accounts receivable under the proposed plan?

Question iv) What are the savings of marginal bad debts under the proposed plan?

Question v) What is the cost of the marginal cash discount?