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:

Cooling-Off Laws

Laws that provide a cooling-off period during which the buyer may cancel the contract, return any merchandise, and obtain a full refund.

Door-to-Door

A direct selling approach where salespeople visit potential customers at their homes or businesses to offer products or services.

Sales Ethics

Principles and standards governing the conduct of individuals or organizations engaged in sales, focusing on fairness, honesty, and responsibility.

Ethical Problems

Situations or dilemmas that involve conflicts between moral imperatives, often challenging individuals or businesses to choose actions that are morally right.