Bavarian Brew Credit Terms

question 5

Multiple Choice

Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days, 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew's opportunity cost of funds invested in accounts receivable is 12%.
-What is Bavarian Brew's total variable cost of annual sales under the new credit policy?

• A) $3,150,000
• B) $3,000,000
• C) $2,500,000
• D) $3,750,000

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