Parker Electronics sells cell phones. During 2011, Parker sold 1,500 units at an average of $500 per unit. Each unit cost Parker $350. At present, Parker offers no sales discounts. Parker’s controller suggests that a generous sales discount policy would increase annual sales to 2,000 units and also improve cash flow. She proposes 3/15, n/20 and believes that 75 percent of the customers will take advantage of the discount.
Required:
1. If the controller is correct, determine how much the new sales discount policy would add to net sales and gross margin.
2. Explain why the sales discount policy might improve cash flow.