Compton Audio sells MP3 players. During 2011, Compton sold 1,000 units at an average of $250 per unit. Each unit cost Compton $100. At present, Compton offers no sales discounts.
Compton’s controller suggests that a generous sales discount policy would increase annual sales to 1,400 units and also improve cash flow. She proposes 5/10, n/30 and believes that 80 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. Conceptual Connection: Explain why the sales discount policy might improve cash flow.