This is not the most profitable option. To calculate the most profitable option, calculate the cost of interest at 20% under each of the options and subtract the interest and the bad debt amount from each revenue amount to find the option with the highest "profit."
The only information we have with which to answer this question is the cost of the bad debts and information to calculate the interest cost of carrying the accounts receivable. So we will calculate the cost of interest at 20% under each of the options and subtract the interest cost and the bad debt amount from each option's revenue to find the option with the highest profit. Option Option Option Option I II III IV Sales revenue $520 $630 $770 $900 Bad debts 20 30 70 100 Interest: 30 days: amount received × .20 ÷ 360 × 30 $5 $3 $3 $2 60 days: amount received × .20 ÷ 360 × 60 3 7 3 7 90 days: amount received × .20 ÷ 360 × 90 5 3 10 10 120 days: amount received × .20 ÷ 360 × 120 0 7 13 20 Total interest cost $13 $20 $29 $39 Net Profit (Revenue ? Bad Debts ? Total Interest) $487 $580 $671 $761 The highest net profit of the four options is with Option IV.
This is not the most profitable option. To calculate the most profitable option, calculate the cost of interest at 20% under each of the options and subtract the interest and the bad debt amount from each revenue amount to find the option with the highest "profit."
This is not the most profitable option. To calculate the most profitable option, calculate the cost of interest at 20% under each of the options and subtract the interest and the bad debt amount from each revenue amount to find the option with the highest "profit."
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Assuming that the firm's cost of capital is 20% and that all payments are made on the first possible day of the aging month, which sales volume will maximize profit?