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AICPA CPA-Business Exam - Topic 1 Question 25 Discussion

Actual exam question for AICPA's CPA-Business exam
Question #: 25
Topic #: 1
[All CPA-Business Questions]

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?

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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 Mitsue at May 03, 2022, 08:40 AM

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Annalee
4 months ago
Is that really the best option for them? Seems risky!
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Jaime
4 months ago
I calculated the cost of carrying, and it looks like $2,160!
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Tawny
4 months ago
Wait, how can they expect to increase sales with longer collection periods?
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Daniel
4 months ago
Totally agree, that affects the calculations a lot!
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Refugia
5 months ago
The variable cost ratio is 70%, right?
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Deane
5 months ago
Hmm, this looks like a tricky one. I'll need to carefully read through the options and think about which ones are necessary to connect to the remote MySQL server and access the 'world' database.
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Kayleigh
5 months ago
This is a pretty complex question with a lot of details to consider. I'll need to carefully review the information about the two existing systems and the new system to determine the best approach that stays within the $3.5 million budget.
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Lizbeth
5 months ago
I remember from my study notes that configuring Maximum Parallel Jobs can help distribute workflow processing more efficiently. That's a strong option.
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