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Berkeley Prints Expects to Have Sales This Year of $15

question 25

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 are the incremental pre-tax profits from this proposal?

Distinguish between favorable and unfavorable variances and their implications for management.

Apply budgeting concepts to various scenarios including service companies, cleaning and maintenance operations, and medical clinics.

Use budget variance analysis to make managerial decisions and adjustments.

Understand the basic concepts and terminologies related to budgeting in a manufacturing and service business context.

Definitions:

Social Desirability

The tendency to give answers in a survey or study that will be viewed favorably by others rather than responding honestly.

Correlation

A statistical measure that indicates the extent to which two or more variables fluctuate together, showing the relationship (positive, negative, or none) between them.

Variables

Elements, features, or factors that are likely to vary or change within the context of a study or experiment.

Positive Correlation

A relationship between two variables where both either increase or decrease together, showing a direct association.