Question 2

Gelmite & Sons Hardware is considering introducing a cash discount policy to its customers so as to improve current sales. There are three possible scenarios that include monthly estimates. Gelmite & Sons uses a 60% mark up on cost on all their products as a general rule. Fixed costs are R8 000 per month.

Scenario A: Representing the Current Scenario Company sold 600 units of the spark nail which they ordered at a wholesaler in Shoppers Town for a cost price of R100 each.

Scenario B: Representing the initial sales target Company will sell 800 units of the spark nail which they ordered at a wholesaler in Shoppers Town for a cost price of R100 each. These sales units are achieved after the introduction of a 20% markdown on the original selling price

Scenario C: Representing a scenario where sales targets are surpassed Company will sell 1 000 units of the spark nail which they ordered at a wholesaler in Shoppers Town for a cost price of R100 each. In order to achieve increased sales, additional marketing costs of R3 000 will be incurred. These sales units are achieved after the introduction of a 20% markdown from the original selling price.

Required:

Which of the three scenarios would you recommend to management? Provide a reason for your answer with reference to net profit before tax.