BC PrintsBC Prints Expects to Have Sales This Year of $15

question 28

Multiple Choice

BC PrintsBC Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the DSO is 60 days, and the bad debt loss percentage is 5%. Also, BC Prints' cost of capital is 15%, and its variable costs total 60% of sales. Since BC Prints wants to improve its profitability, a proposal has been made to offer a 2% discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000 and that 50% of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4%.
-Refer to Scenario: BC Prints.What would be the incremental bad debt losses if the change were made?

• A)$250,000
• B)$130,000
• C)-$130,000 (bad debt losses would decline)
• D)-$250,000 (bad debt losses would decline)

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Definitions:

Schedule A

A form used in the U.S. to itemize deductions for taxes, including medical expenses, state and local taxes, and charitable contributions.

Personal Property Taxes

Taxes levied by local governments on the value of personal property such as vehicles, boats, and equipment.

FICA Taxes

Federal taxes required to be deducted from employees' wages for Social Security and Medicare, also paid in part by employers.

Adjusted Gross Income

The measure of one's taxable income, calculated as gross income minus allowable adjustments.