Bluegrass Distilleries, Inc

question 22

Multiple Choice

Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million annually. Based on experience with these types of customers, the firm estimates that the average collection period would be 90 days and that the bad-debt loss ratio would be 6%. The firm's variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax return (i.e., opportunity cost) on receivables investments is 20%. When converting from annual to daily data or vice versa, assume there are 365 days per year. Assuming Bluegrass extends full credit to these (previously delinquent) customers, determine the total increase in credit-related costs.

• A) $1,000,000
• B) $1,093,151
• C) $400,000
• D) $600,000

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Definitions:

Arithmetic Average

A simple mean calculated by adding a set of numbers and dividing the sum by the count of those numbers, used to determine central tendencies.

Arithmetic Average Return

The return earned in an average year over a multi-year period.

Total Percentage Return

A financial metric that measures the total return of an investment, expressed as a percentage, including all dividends and capital gains.

Dividend

A payment made by a corporation to its shareholders, usually as a distribution of profits, which can be issued in various forms such as cash payments or further shares.