Berkeley Prints
Berkeley Prints expects to have sales this year of $15 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. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Because 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.
-Refer to Berkeley Prints.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) $260,500

Question

Quizplus · Accepted Answer

The incremental cost of carrying receivables decreases due to a reduction in DSO and bad debt losses, leading to lower financing costs and reduced losses from uncollectible accounts.

Berkeley Prints Berkeley Prints Expects to Have Sales This Year of $15