What is the incremental carrying cost on receivable

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Reference no: EM132971946

Question - Blue Co. is considering modifying its credit terms from 3/10, n/20 to 4/10, n/20 in order to collect receivables quicker. Currently, 60% of Blue Co.'s customers take the 3% discount. Under the new credit term, discount customers are expected to rise to 75%. Regardless of the credit terms, 50% of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. More generous cash discount terms are expected to increase credit sales from P1,800,000 to P2,160,000 per year. Currently, bad debts expense is 1.5% of sales. Blue Co.'s variable cost ratio is 50%. The interest rate on funds invested in accounts receivable is 3% while the firm's applicable income tax rate is 30%. What is the incremental carrying cost on receivable?

a. 37.5

b. 1,250

c. 2,500

d. 75

Reference no: EM132971946

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