Bluegrass Distilleries, Inc

question 16

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 past 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 percent.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 percent.When converting from annual to daily data or vice versa, assume there are 365 days per year.If 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:

Pay-As-You-Go Principles

A funding approach where current revenues (like taxes) are used to pay for current expenses, avoiding debt by paying for services and benefits as they are received.

Life Expectancy

The average period that a person may expect to live, often used as a statistical measure of the health of a population.

Federal Government

The national government of a federated state, which holds the supreme legislative, executive, and judicial power over a country.

Net Income

The total earnings of a company after all expenses and taxes have been deducted from total revenue.