Dizzy Animators, Inc

question 163

Multiple Choice

Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent.
-What is the marginal investment in accounts receivable under the proposed plan?

• A) $1,382,500
• B) $1,234,375
• C) $1,567,300
• D) $1,841,570

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Definitions:

Total Assets

The total of all current and non-current assets that a company possesses.

Total Equity

The total net value of a company, calculated by deducting total liabilities from total assets; also known as shareholders' equity.

Financial Statements

Papers that offer a summary of a corporation's financial status, featuring its balance sheet, profit and loss account, and statement of cash flows.

Accounting Procedures

The methods and processes used to record, summarize, and report financial transactions.