Question

Nguyen Brothers Inc. expects to have sales this year of $20 million under its current credit policy. The present terms are net 45; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 4 percent. Since RBP wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 20 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 45 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 70 percent, and the cost of capital is 12 percent. What would be the incremental cost of carrying receivables if this change were made?

		$ 48,750
		−$35,792 (carrying costs would decline)
		$ 57,900
		−$56,959 (carrying costs would decline)
		$ 61,520

Answer 1