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Question
Exhibit 27.3
Van Doren Housing expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Van Doren's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Van Doren 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 Exhibit 27.3. What would be the incremental bad debt losses if the change were made?
a. $130,000
b. $250,000
c. -$250,000 (bad debt losses would decline)
d. -$130,000 (bad debt losses would decline)
e. $620,000
Answer
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