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 cost to BC of the discounts taken?
A)-$108,750
B)$116,750
C)$155,000
D)$225,000

Question

Quizplus · Accepted Answer

The cost of the discounts taken can be calculated as 2% of the sales made under the new terms where customers take the discount. With an increase in sales to $15.5 million and 50% of customers taking the discount, the sales subject to the discount are $7.75 million ($15.5 million * 50%). Therefore, the cost of the discounts is 2% of $7.75 million, which equals $155,000.

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