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J. James Book Publishers is trying to decide whether to offer a 3% cash discount...

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Question

Accounting

J. James Book Publishers is trying to decide whether to offer a 3% cash discount for payments made within 10 days, making its new terms 3/10, net 30. On average, its paying customers currently pay in 40 days under its present terms of net 30. A sales analyst estimates that sales will stay the same. The existing bad-debt loss rate is 3%; the rate under the new policy will be the same. It is estimated that 40% of J. James paying customers will continue to pay in 40 days, on average. The company's annual cost of capital is 10%. Annual sales will remain unchanged at $250 million, and the variable cost ratio will continue to be 60%. The variable expenses for credit administration and collections will drop from 5% to 4% if the cash discount is implemented.

  1. What is the optimal cash discount percent for J. James?

    a.

    0.2791%
    b.

    0.5653%
    c.

    0.4092%
    d.

    0.1689%

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