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AICPA Exam CPA-Business Topic 1 Question 25 Discussion
Topic #: 1
Gartshore Inc. is a mail-order book company. The Company recently changed its credit policy in an attempt to increase sales. Gartshore's variable cost ratio is 70 percent and its required rate of return is 12 percent. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 days to 40 days. Ignoring any tax implications, what is the cost of carrying the additional investment in accounts receivable, using a 360-day year?
Choice 'a' is correct. The cost of carrying accounts receivable now is the variable cost of creating the account receivable times the cost of that capital during the collection period. The cost of the investment in accounts receivable is now:
Choice 'c' is incorrect. This considers the entire account receivable as a cost.
Choices 'b' and 'd' are incorrect, per the above calculation.
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