Reston Inc.has expected sales of $17,000,000.While 10 percent of its customers pay cash,the remaining 90 percent pay on credit with 40 percent paying on Day 10,30 percent paying on Day 20,15 percent paying on Day 25,and 15 percent paying on Day 30.Assume that the cost of funds invested in receivables is 10 percent.Suppose that the firm's customers begin paying later,such that the new DSO increases to 24 days,that the firm uses a 360-day year,and that the firm's variable cost ratio is 80 percent.What is the additional interest cost to Reston of the additional investment in A/R caused by the delay in payment by its customers?
A) $19,550
B) $24,438
C) $42,500
D) $78,625
E) $102,000

Question

Quizplus · Accepted Answer

The correct answer is A.The additional interest cost to Reston of the additional investment in A/R caused by the delay in payment by its customers is $19,550. This is calculated as follows:Additional DSO = 24 days - 15 days = 9 daysAdditional investment in A/R = (9 days / 360 days) * $17,000,000 = $425,000Additional interest cost = $425,000 * 10% = $19,550