Berkeley Prints
Berkeley Prints 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. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent 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 percent 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 percent.
-Refer to Berkeley Prints.What would be the cost to Berkeley of the discounts taken?
A) $116,750
B) −$108,750
C) $155,000
D) $225,000
E) $260,500

Question

Quizplus · Accepted Answer

The cost of the discounts taken can be calculated as 2% of the sales that take the discount. With an increase in sales to $15.5 million and 50% of customers taking the discount, the sales subject to the discount are $7.75 million. Therefore, the cost of the discounts is 2% of $7.75 million, which equals $155,000.

Berkeley Prints Berkeley Prints Expects to Have Sales This Year of $15