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What is the impact of higher discount policy

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Question - SelWel Ltd currently offers credit terms of 2/10 net 45 to customers. Last year SelWel clocked sales of Rs 200 cr. Average Collection Period (ACP) was 25 days, Variable cost ratio is 65%, and fixed cost is Rs 15 cr 25% of the customers paid up early to get benefit of the cash discount.

The CEO has asked the Sales team to take aggressive sales targets next year. The Sales Manager of SelWel has estimated that by offering higher discount terms of 3/10 net 45, sales will increase by 20%, ACP will reduce by 7 days, and 60% of customers will go in for cash discount Tax rate for the company is 30%, and carrying cost of receivables is 14%.

What is the impact of higher discount policy on the Residual Income?

Should the company go in for higher discount proposed by the Sales Manager? Show your calculations clearly?

Reference no: EM133100356

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