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 cost of carrying receivables if the change were made?
A)-$108,750 (carrying costs would decline)
B)-$225,000 (carrying costs would decline)
C)$116,250
D)$157,900

Question

Quizplus · Accepted Answer

The incremental cost of carrying receivables would decline by $108,750 due to the reduction in DSO from 60 to 30 days and the decrease in bad debt loss percentage from 5% to 4%.

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