The Floppy Disk Company currently extends credit to its customers, offering a discount of 4% if the account is paid within 20 days, oth- erwise the full amount is due 40 days from the date of purchase. It is considering changing its credit terms to offer more incentive to its customers to pay early. It is proposing increasing its discount to 6% if accounts are paid within 20 days. Its contribution margin is 25% and its before-tax opportunity cost of funds is 15%.
a. Calculate the cost of trade credit to Floppy’s customers that choose to pay on the net day under the present credit terms.
b. Calculate the cost of trade credit to Floppy’s customers that choose to pay on the net day under the proposed credit terms.
c. If Floppy’s sales are expected to increase by $5 million under these new credit terms and the percentage of customers paying within 10 days increases from 20% to 30%, what is the cost of the change in the discount for the Floppy Disk Company?