Naman Ltd. currently makes all sales on credit and offers no cash discount. It is considering a 2% cash discount for payment within 10 days. The firm's current average collection period is 60 days, sales are 2,00,000 uni

Effect of extending cash discount to customer Particulars Amount (₹) Increased sales revenue (25,000 * ₹ 30) 7,50,000 Less: variable cost (25,000 * ₹ 20) (5,00,000) Incremental contribution 2,50,000 Add: savings in cost due to decrease in investment in debtors (W.N 1) 29,167 Less: cost of additional working capital requirement (₹ 1,00,000 * 0.20) (20,000) Less: cost involved in cash discount (0.02 * 2,25,000 * ₹ 30 * 0.5) (67,500) Profit 1,91,667 Working notes (W.N 1) Saving due to decrease in average collection period: Present investment in debtors (without cash discount) = (2,00,000 units * ₹ 25 * 60 days) / 360 days = ₹ 8,33,333 Decrease in investment in debtors (with cash discount) = ((2,00,000 units * ₹ 25) + (25,000 units * ₹ 20)) * 45 days / 360 days = (50,00,000 + 5,00,000) * 45 / 360 = 55,00,000 * 45 / 360 = ₹ 6,87,500 Decrease in investment in debtors = ₹ 8,33,333 - ₹ 6,87,500 = ₹ 1,45,833 Savings in cost = ₹ 1,45,833 * 0.20 = ₹ 29,167 Decision: It is advised that the firm should offer cash discount to its customer as it results in an additional profit of ₹ 1,91,667.