Help on these two very similar BEC working capital questions

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    Topic
  • #1651462
    nalratoss
    Participant

    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
    144,000

    Question 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 days

    The pre-tax cost of carrying the additional investment in receivables, using a 360-day year, would be

    5,760
    960
    8,160
    9,600

    FAR-80

    AUD-77

    REG-75

    BEC-82

     

    I'm done done!

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  • #1655770
    sacpa
    Participant

    Question 1:
    720,000 x 0.2 = 144,000 Contribution margin
    720,000 x 0.8 = 576,000
    576,000/360 = 1,600
    1,600 x 75 x 0.2 = 24,00

    144,000 – 24,000 = 120,000

    Question 2:
    3,600,000 x 0.6 = 2,160,000
    2,160,000/360 = 6,000
    6,000 x 30 x 0.1 = 18,000

    3,960,000 x 0.6 = 2,376,000
    2,376,000/360 = 6,600
    6,600 x 36 x 0.1 = 23,760

    23,760 – 18,000 = 5,760

    Winners don't quit. Quitters don't win.

    FAR - < than 75, 10/2013, 2/2015
    BEC - < than 75, 10/2013
    AUD - < than 75, 8/2015, 1/2016

    ~ Winners fail until they succeed. Losers quit when they fail. - Robert Kiyosaki
    ~ I survived because the fire inside burned brighter than the fire around me.
    ~ Something will grow from all you are going through. And it will be YOU.
    ~ Right now you may not be where you intend to be, but it's where you need to be in order to get where you want to go.

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