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 are the incremental pre-tax profits from this proposal?
A) $283,750
B) $250,500
C) $303,250
D) $493,750
E) $288,250

Question

Quizplus · Accepted Answer

The incremental pre-tax profits are calculated by considering the increase in sales, reduction in bad debt losses, cost of offering discounts, and the change in carrying costs due to the change in DSO. The correct calculation results in an incremental pre-tax profit of $283,750.

Berkeley Prints Expects to Have Sales This Year of $15