Berkeley Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.
-What would be the incremental cost of carrying receivables if the change were made?
A) -$108,750 (carrying costs would decline)
B) $116,250
C) $157,900
D) -$225,000 (carrying costs would decline)
E) $260,000

Question

Quizplus · Accepted Answer

The incremental cost of carrying receivables is calculated by comparing the carrying costs before and after the change. The reduction in DSO from 60 to 30 days and the decrease in bad debt loss percentage from 5% to 4% lead to a decline in carrying costs, resulting in a negative incremental cost of -$108,750.

Berkeley Prints Expects to Have Sales This Year of $15