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Dear Sir,
This example has already been asked for, but I need an answer for a different part of the question.
Enticement Co currently expects sales of $50,000 a month. Variable costs of sales are $40,000 a month (all payable in the month of sale). It is estimated that if the credit period allowed to
customers was to be increased from 30 days to 60 days, sales volume would increase by 20%.
All customers would be expected to take advantage of the extended credit. The cost of capital is 12.5% a year.What is the 10k in Annual contribution from additional sales ($10,000 × 12 months × 20%)?
Is it a difference between 50k and variable costs, or is it 50k x 120%? Why is the annual contribution from sales 10k x 12 months?
Thank you for the response!
The are currently making a contribution of $10,000 a month. Therefore if they increase the credit period the contribution will increase by 20% x $10,000 per month.
There are 12 months in a year and so the annual contribution will increase by 12 x 20% x $10,000.
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