Exhibit Van Doren Van Doren Housing Expects to Have Sales This Year of This

Multiple Choice

Exhibit Van Doren
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 Van Doren.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