Bluegrass Distilleries, Inc.refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them.This policy results in lost sales of $10 million annually.Based on past experience with these types of customers, the firm estimates that the average collection period would be 90 days and that the bad-debt loss ratio would be 6 percent.The firm's variable cost ratio is 0.80, making its profit contribution ratio 0.20.Bluegrass Distilleries' required pretax return (i.e., opportunity cost) on receivables investments is 20 percent.When converting from annual to daily data or vice versa, assume there are 365 days per year.Determine the net effect on Bluegrass Distilleries' pretax profits of extending credit to these (previously delinquent) customers
A)$906,849
B)$2,000,000
C)$306,849
D)$1,500,000

Question

Quizplus · Accepted Answer

Net Change in Pretax Profits = $10,000,000 × 0.20 - ($10,000,000/365 × 90 × 0.20) -
0.06 × $10,000,000 = $906,849