AICPA Exam CPA-Business Topic 2 Question 21 Discussion

Choice 'a' is correct.

Step 1 Determine the average accounts receivable balance and the additional accounts receivable as follows:

Therefore, the accounts receivable balance is $96,000 higher under the new credit policy.

Step 2 Determine the additional INVESTMENT in the additional accounts receivable.

Although Wilson has an additional $96,000 in accounts receievable, Wilson's actual investment in the additional accounts receivable is only 60% of $96,000 (because variable costs are 60% of sales). Wilson's investment in the additional accounts receivable is calculated as follows:

$96,000 x 60% = $57,600

Step 3 Calculate the cost of carrying the additional accounts receivable.

Wilson's additional investment in accounts receivable is $57,600 and we are given a 10% required rate of return. This means that Wilson's carrying cost of $5,760 is calculated as follows:

$57,600 x 10% = $5,760

Choices 'b', 'c', and 'd' are incorrect, per the above calculation.