East Lansing Appliances
East Lansing Appliances (ELA) expects to have sales this year of R15 million under its current credit policy.The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent.Since ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days.This change would reduce expected sales by R500,000, but it would also shorten the DSO on the remaining sales to 30 days.Expected bad debt losses on the remaining sales would fall to 3 percent.The variable cost percentage is 60 percent, and the cost of capital is 15 percent.
-Refer to East Lansing Appliances.What would be the incremental cost of carrying receivables if this change were made?

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 and bad debt losses leads to a decline in carrying costs.