BC PrintsBC Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the DSO is 60 days, and the bad debt loss percentage is 5%. Also, BC Prints' cost of capital is 15%, and its variable costs total 60% of sales. Since BC Prints wants to improve its profitability, a proposal has been made to offer a 2% 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% 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%.
-Refer to Scenario: BC Prints.What would be the incremental bad debt losses if the change were made?
A)$250,000
B)$130,000
C)-$130,000 (bad debt losses would decline)
D)-$250,000 (bad debt losses would decline)

Question

Quizplus · Accepted Answer

With the proposed change, the bad debt loss percentage is expected to decrease from 5% to 4%. Therefore, there would be a decline in bad debt losses, and the answer would be negative. The amount of the decline would be $130,000 (5% of $15 million is $750,000, and 4% of $15.5 million is $620,000, so the difference is $130,000).

BC PrintsBC Prints Expects to Have Sales This Year of $15