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Can you please tell me how to calculate Maximum Discount such as in the question WQZ Co (BPP kit – Dec 2010 requirement b)?
It says that “The maximum discount will be where the costs equal the benefits of $1,050,000” which I couldn’t understand. Please explain!
At the moment they are considering offering a discount of 1%. This will cost them $219,000 and will save them $1,050,000 (because of the saving in the finance cost and the savings on administration etc..).
It is worthwhile offering a 1% discount because the saving is greater than the cost of the discount.
If they offer a bigger discount, then it will still be worthwhile provided that the cost of the discount is not more than the saving of $1,050,000.
The maximum discount would be when the cost of the discount was equal to $1,050,000, because a bigger discount would mean that they would be losing money.
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