Berkeley Prints Berkeley Prints Expects to Have Sales This Year of $15

question 90

Multiple Choice

Berkeley Prints
Berkeley Prints 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. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Because 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.
-Refer to Berkeley Prints.What would be the incremental cost of carrying receivables if the change were made?

• A) −$108,750 (carrying costs would decline)
• B) $116,250
• C) $157,900
• D) −$225,000 (carrying costs would decline)
• E) $260,500

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Definitions:

Aging of Receivable Method

An accounting technique used to estimate uncollectible debts by analyzing the age of accounts receivable.

Allowance for Doubtful Accounts

A contra-asset account used to estimate the portion of a company's accounts receivable that may ultimately not be collectible.

Bad Debts Expense

Bad debts expense represents the amount of receivables a company estimates it will not be able to collect from customers over a period.

Aging of Receivable Method

An accounting technique used to estimate bad debts by analyzing accounts receivable based on the length of time they have been outstanding.