East Lansing Appliances (ELA) Expects to Have Sales This Year

Multiple Choice

East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Since ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent.
-What would be the incremental cost of carrying receivables if this change were made?

A) $108,750
B) -$116,250 (carrying costs would decline)
C) $157,900
D) -$225,000 (carrying costs would decline)
E) $260,500