Campbell Computing Inc

question 29

Multiple Choice

Campbell Computing Inc.currently has sales of $1,000,000, and its days sales outstanding is 30 days.The financial manager estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase sales to $1,200,000.However, bad debt losses, which were 2 percent on the old sales, would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent) .Variable costs are 80 percent of sales, and Campbell has a 15 percent receivables financing cost.What would the annual incremental pre-tax profit be if Bass extended its credit period?

• A) −$20,000
• B) −$10,000
• C) $0
• D) $10,000
• E) $20,000

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Definitions:

Machine-Hours

A measure of production activity that represents the hours machines are operating to manufacture products.

Job-Order Costing System

An accounting system that calculates the cost of individual jobs or batches in manufacturing or service sectors, tracking direct materials, direct labor, and overhead per job.

Predetermined Overhead Rate

An estimated rate used to apply manufacturing overhead to products or job orders, calculated before a period begins based on expected costs and activity levels.

Traditional Costing System

A method of cost accounting that allocates factory overhead to products based on volume-driven measures such as machine hours or labor hours.