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 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 the increased sales, additional marketing costs of R3 000 will be incurred. These sales units are achieved after the introduction of a 20% markdown from 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.
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 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 the increased sales, additional marketing costs of
R3 000 will be incurred.
These sales units are achieved after the introduction of a 20% markdown from 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.
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