East Lansing Appliances

question 48

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 are the incremental pre-tax profits from this proposal?

• A) $181,250
• B) $271,750
• C) $256,250
• D) $206,500
• E) $231,250

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Definitions:

Quota System

A method for controlling immigration or trade by allocating specific limits to certain groups or countries.

Immigrants

People who move to a country other than their native one to live, often in search of better living conditions, employment, or to escape conflict.

Freedom

The power or right to act, speak, or think as one wants without hindrance or restraint.

Affluence

The state of having a great deal of wealth or material goods; wealthiness.