Answer (B) is correct . The projected average balance in receivables under the old policy was $300,000 [$3,600,000 × (30 days ÷ 360 days)]. Under the new policy, the average balance will be $396,000 [$3,960,000 × (36 days ÷ 360 days)]. Hence, the average balance is $96,000 higher under the new policy ($396,000 – $300,000). The pre-tax cost of carrying the additional investment in receivables can be calculated as follows: Increased investment in receivables -- gross $96,000 Times: variable cost ratio × 60% Increased investment in receivables -- net $57,600 Times: opportunity cost of funds × 10% Incremental cost of new credit plan $5,760
Answer (A) is incorrect because The amount of $960 results from using a 10% variable cost ratio.
Answer (C) is incorrect because The amount $8,160 is based on a differential between the average receivables balances of $136,000.
Answer (D) is incorrect because The amount of $9,600 results from failing to adjust for the variable cost ratio.
|
The pre-tax cost of carrying the additional investment in receivables, using a 360-day year, would be