Answer (A) is correct . The projected average balance in receivables under the old policy was $383,333 [$4,600,000 × (30 days ÷ 360 days)]. Under the new policy, the average balance will be $482,222 [$4,960,000 × (35 days ÷ 360 days)]. Hence, the average balance is $98,889 higher under the new policy ($482,222 – $383,333). The pre-tax cost of carrying the additional investment in receivables can be calculated as follows: Increased investment in receivables -- gross $98,889 Times: variable cost ratio × 50% Increased investment in receivables -- net $49,444 Times: opportunity cost of funds × 11% Incremental cost of new credit plan $ 5,439
Answer (B) is incorrect because The amount of $10,878 results from failing to adjust for the proportion of incremental costs included in the additional receivables.
Answer (C) is incorrect because The amount of $13,778 is the average daily sales under the new policy.
Answer (D) is incorrect because The amount of $98,890 is the amount of the additional receivables.
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The pre-tax cost of carrying the additional investment in receivables, assuming a 360-day year, is