A Firm Is Considering Relaxing Credit Standards, Which Will Result

question 173

Multiple Choice

A firm is considering relaxing credit standards, which will result in annual sales increasing from $1.5 million to $1.75 million, the cost of annual sales increasing from $1,000,000 to $1,125,000, and the average collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of sales. The firm's required return on investments is 20 percent. The firm's cost of marginal investment in accounts receivable is ________. (Assume a 360-day year.)

• A) $5,556
• B) $9,944
• C) $12,153
• D) $152,778

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Definitions:

Title Passage

The point in time when the ownership (title) of goods passes from seller to buyer as per the terms of the sales contract.

Perpetual Inventory System

An accounting method that records goods transactions immediately through the use of computer systems, providing a continuous balance of inventory.

Cost Of Merchandise Sold

This is the total cost incurred to produce or acquire the goods sold by a company during a specific period.

Debit Balance

An account balance that occurs when the total amount of debits exceeds the total amount of credits in an account.