Flit Co

(d) Flit Co currently has total income of $30 million per year, of which 80% is from credit sales, and a net profit margin of 10%. Due to fierce competition, Flit Co has lost market share and is looking for ways to win back former customers and to keep the loyalty of existing customers. The sales director has pointed out that a major competitor of Flit Co currently offers an early settlement discount of 0.5% for settlement within 30 days, while Flit Co itself does not offer an early settlement discount. He suggests that if Flit Co could match this early settlement discount, annual income from credit sales would increase by 20%. Credit customers of Flit Co take an average of 51 days to settle invoices. Approximately 0.5% of the company’s credit sales have historically become bad debts each year and written off as irrecoverable. The finance director has been advised that offering an early settlement discount of 0.5% for payment within 30 days would increase administration costs by $35,000 per year, while 75% of credit customers would be likely to take the discount. The credit controller believes that bad debts would fall to 0.375% of credit sales if the early settlement discount were introduced. Flit Co has an average short?term cost of finance of 4% per year. Assume that there are 360 days in each year. (d) Evaluate whether Flit Co should offer the early settlement discount. ? (6 marks) This question I'm clear about finding bad debts, trade receivables and all other stuff.. I'm not clear how to calculate the Increase in Net profit