Determining the optimal credit policy is based on a trade-off of:
A) carrying costs of granting credit and making an investment in receivables.
B) stock out costs of losing sales from not offering credit.
C) the opportunity cost of lost sales from not offering credit.
D) Both carrying costs of granting credit and making an investment in receivables; and the opportunity cost of lost sales from not offering credit.
E) Both stock out costs of losing sales from not offering credit; and the opportunity cost of lost sales from not offering credit.

Question

Quizplus · Accepted Answer

The optimal credit policy involves balancing the carrying costs of granting credit and investing in receivables with the opportunity cost of lost sales from not offering credit. A company needs to find an optimal credit policy that maximizes profits while minimizing risk. The cost of carrying receivables includes financing costs, billing costs, and collection costs. On the other hand, by not offering credit, a company may lose sales and potentially lose customers to competitors who offer credit. Therefore, a company should consider both the carrying costs of granting credit and the opportunity cost of lost sales to determine the optimal credit policy.

Determining the Optimal Credit Policy Is Based on a Trade-Off