A firm is considering relaxing credit standards, which will result in annual sales increasing from $1.5 million to $1.75 million, the cost of annual sales increasing from $1,000,000 to $1,125,000, and the average collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of sales. The firm's required return on investments is 20 percent. The firm's cost of marginal investment in accounts receivable is ________. (Assume a 360-day year.)
A) $5,556
B) $9,944
C) $12,153
D) $152,778

Question

Quizplus · Accepted Answer

First, let's calculate the incremental investment in accounts receivable:
$1.75 million / 360 * 55 days - $1.5 million / 360 * 40 days = $250,000

Next, let's calculate the incremental profit from the increased sales:
($1.75 million - $1.125 million) * (1 - 1.5%) = $505,625

Finally, let's calculate the cost of the marginal investment in accounts receivable:
$250,000 / ($505,625 / 0.2) = $12,153.85, which rounds to $12,153.

Therefore, the answer is C, $12,153.

A Firm Is Considering Relaxing Credit Standards, Which Will Result