Solved – The McCollough Company has a variable operating cost ratio (VCR) of 70%, its cost of capital is 10% and current sales are $10,000. All of its sales

Question

The McCollough Company has a variable operating cost ratio (VCR) of 70%, its cost of capital is 10% and current sales are $10,000. All of its sales are on credit, and its currently sells on terms of net 30. Its account receivable balance is $1,500. McCollough is considering a new credit policy with terms of net 45. Under the new policy, sales will increase to $12,000 and account receivables will rise to $2,500. If McCollough changes its credit policy to net 45, by how much will its cost of carrying receivables increase? Assume a 360-day year.

Answer

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