Exhibit Reese Brothers
Reese Brothers Publishers Inc (RBP) 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.Since RBP 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 $500,000, 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 Exhibit Reese Brothers.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 considering the reduction in sales, the decrease in days sales outstanding (DSO), and the change in bad debt losses. The proposed change would reduce sales, thereby reducing the amount of receivables and the cost associated with carrying them. This results in a decline in carrying costs, which is why the correct answer indicates that carrying costs would decline.

Exhibit Reese Brothers Reese Brothers Publishers Inc (RBP) Expects to Have Sales This