Dome Metals has credit sales of $432,000 yearly with credit terms of net 90 days, which is also the average collection period. Assume the firm adopts new credit terms of 2/15, net 90 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 11 percent. The new credit terms will increase sales by 10% because the 2% discount will make the firm's price competitive.
a. If Dome earns 15 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.)
b. Should the firm offer the discount?