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