Berkeley Prints Expects to Have Sales This Year of $15

question 4

Multiple Choice

Berkeley Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent 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 percent 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 percent.
-What would be the incremental bad debt losses if the change were made?

• A) $130,000
• B) $250,000
• C) -$250,000 (bad debt losses would decline)
• D) -$130,000 (bad debt losses would decline)
• E) $620,000

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Definitions:

Dependent Variable

The determined variable in a causal relationship.

Independent Variable

The variable in an experiment or study that is manipulated or changed to observe its effect on a dependent variable.

Slope

In the field of mathematics, the slope is determined by the steepness or angle of elevation of a line, calculated as the ratio between the vertical and horizontal differences of two points on the line.

Positively Related

A relationship in which two variables move in the same direction; as one increases, the other also increases.