Risk Should Be Incorporated into the Decision to Grant Credit

question 35

Multiple Choice

Risk should be incorporated into the decision to grant credit by:

• A) decreasing the discount rate.
• B) increasing the credit period to allow for customers in financial distress to reorganize.
• C) decreasing the cash inflows, or the numerator of the NPV formula.
• D) increasing the cash inflows, or the numerator of the NPV formula.
• E) increasing costs per unit.

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Definitions:

Manufacturing Overhead

All indirect costs related to the manufacturing process, such as utilities and salaries for management, that cannot be directly traced to specific products.

Direct Materials

Ingredients that are identifiable as directly contributing to the creation of a product.

Direct Labor

The cost of labor directly involved in the manufacture of products, such as wages paid to workers on the assembly line.

Manufacturing Overhead

All indirect costs associated with the production process, including utilities, depreciation, and salaries of non-direct labor.