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These two questions are very similar—when I saw them in MCQ practice I’m clueless—like what’s the purpose of telling me opportunity cost and variable cost percentage in credit term change?
Question 1
A company with $4.8 million in credit sales per year plans to relax its credit standards, projecting that this will increase credit sales by $720,000. The company’s average collection period for new customers is expected to be 75 days, and the payment behavior of the existing customers is not expected to change. Variable costs are 80% of sales. The firm’s opportunity cost is 20% before taxes. Assuming a 360-day year, what is the company’s benefit (loss) on the planned change in credit terms?28,800
120,000
0
144,000Question 2
The following information regards a change in credit policy. The company has a required rate of return of 10% and a variable cost ratio of 60%.Old Credit policy: Sales 3,600,000; average collection period 30 days
New Credit policy: Sales 3,960,000; average collection period 36 daysThe pre-tax cost of carrying the additional investment in receivables, using a 360-day year, would be
5,760
960
8,160
9,600FAR-80AUD-77
REG-75
BEC-82
I'm done done!
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