East Lansing Appliances

question 109

Multiple Choice

East Lansing Appliances
East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Because ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent.
-Refer to East Lansing Appliances.What would be the incremental cost of carrying receivables if this change were made?

• A) $108,750
• B) −$116,250 (carrying costs would decline)
• C) $157,900
• D) −$225,000 (carrying costs would decline)
• E) $260,500

---

Definitions:

Creditor Nation

A country that has more claims (investments and loans) on other countries than other countries have on it, typically indicated by a positive balance of payments.

Current Account Deficit

A situation where a country's total imports of goods, services, and transfers exceed its total exports.

Swiss Francs

The currency of Switzerland and Liechtenstein, known by the ISO code CHF, and recognized for its stability and reliability.

Demand for Swiss Francs

The desire or need by individuals or institutions to acquire Swiss Francs, often influenced by factors such as investment opportunities and economic stability.