Dizzy Animators, Inc

question 147

Multiple Choice

Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent.
-What is the firm's marginal profit contribution from sales under the proposed plan of initiating the cash discount?

• A) $40,000
• B) $100,000
• C) $62,500
• D) $22,500

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Definitions:

Product's Life Cycle

The progression of a product through several stages including introduction, growth, maturity, and decline, affecting marketing strategies and management decisions.

Nostalgia

A sentimental longing or wistful affection for the past, typically for a period or place with happy personal associations.

Antagonism

Opposition or active resistance against something; in pharmacology, it may refer to a substance that interferes with or inhibits the physiological action of another.

Price Changes

Adjustments made to the selling price of goods or services in response to market demands, cost of production, or competitive landscape.