Table 15.7 Fizzy Animators, Inc. Currently Makes All Sales on Credit and Credit

question 29

Multiple Choice

Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.)
-What is the cost of marginal investment in accounts receivable under the proposed plan? (See Table 15.7)

• A) $313,460
• B) $276,500
• C) $246,875
• D) $368,314

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Definitions:

Demographic Transition

The massive decline in birth rates that occurs once a developing country achieves higher standards of living because the perceived marginal cost of additional children begins to exceed the perceived marginal benefit.

Death Rates

The number of deaths in a particular population, scaled to the size of that population, per unit of time, typically expressed per 1000 individuals per year.

Productive Resources

Resources that are used in the production of goods and services, including land, labor, and capital.

Total Fertility Rate

The average number of children per lifetime birthed by a nation’s women.