Discuss AICPA CPA-Business Exam Topic 2 Question 129

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

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.

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17 comments · newest first

Leota 22 days ago

I agree with Yuki. The longer collection period impacts costs a lot.

Jamika 28 days ago

I’m leaning towards A) $1,512. The math seems straightforward.

Yuki 1 month ago

I feel like it's C) $2,160. The increase in receivables is significant.

Chuck 1 month ago

This question is tricky! I think the answer is B) $2,000.

Antione 1 month ago

I agree with Delmy. The longer collection period impacts costs a lot.

Cherrie 2 months ago

I’m leaning towards A) $1,512. The math seems straightforward.

Delmy 2 months ago

I feel like it's C) $2,160. The increase in receivables is significant.

Tracey 2 months ago

This question is tricky! I think the answer is B) $2,000.

Hollis 2 months ago

Is it really worth it to change the credit policy like this?

Rosenda 2 months ago

Definitely going with option C, $2,160 seems right!

Ettie 2 months ago

Wait, how can they expect to increase sales with longer collection periods?

Dominga 3 months ago

I think the cost of carrying those receivables will be around $2,000.

Reita 3 months ago

The variable cost ratio is pretty high at 70%.

Doug 3 months 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!

Judy 3 months 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?

Sarah 3 months 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.

Kristeen 4 months ago

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

AICPA CPA-Business Exam - Topic 2 Question 129 Discussion