AICPA CPA-Business Exam - Topic 2 Question 129 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 129
Topic #: 2

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?

A$1,512

B$2,000

C$2,160

D$12,600

Show Suggested Answer

Suggested Answer: A

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.

by Antione at Jun 29, 2026, 03:02 AM

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Doug

7 hours ago

I think the key is to calculate the additional investment in accounts receivable due to the longer collection period. I just hope I remember the right steps!

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Judy

5 days ago

I feel like I might be mixing up the formulas. Is it just the increase in sales multiplied by the variable cost ratio and then adjusted for the collection period?

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Sarah

11 days ago

This question is similar to one we practiced where we had to determine the cost of carrying inventory. I think we need to find the increase in receivables first.

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Kristeen

16 days ago

I remember something about calculating the cost of carrying receivables, but I'm not sure how to apply the variable cost ratio here.

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