The total cost of granting credit has two components. ________ are the costs of lost sales incurred when credit is not granted and are inversely related to the amount of credit extended. ________ are the cash flows that are incurred when credit is granted and are positively related to the amount of credit extended.

Question

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Opportunity costs represent the lost sales when credit is not extended, which decrease as more credit is granted. Carrying costs are the costs associated with granting credit, such as administrative costs and the risk of bad debts, which increase with more credit extended.

The Total Cost of Granting Credit Has Two Components