East Lansing Appliances

question 85

Multiple Choice

East Lansing Appliances
East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Because ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent.
-Refer to East Lansing Appliances.What would be the incremental bad debt losses if the change were made?

• A) $315,000
• B) $260,500
• C) −$260,500 (bad debt losses would decline)
• D) −$315,000 (bad debt losses would decline)
• E) $0 (no change would occur)

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Definitions:

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A stage of human development that typically refers to individuals aged 65 and older.

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A social standing or class of an individual or group often measured by education, income, and occupation.

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The length of time an individual lives, often used in the context of life span extension and quality of life.

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Measure of a person’s ability to function effectively in his or her physical and social environment in comparison with others of the same chronological age.