Question

Bugle Boy Company has an opportunity cost of funds of 10 percent and a credit policy based on net 45 days. If all of its customers adhere to the stated terms and annual sales increase from $4.11 million to $6.12 million, what will be the increased cost of funds tied up in accounts receivable? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to the nearest whole dollar. Enter answer in whole dollar not in million.)

Answer 1

To calculate the increased cost of funds tied up in accounts receivable, we need to determine the increase in accounts receivable and then calculate the cost of funds for that increase.

The increase in accounts receivable can be calculated by subtracting the initial sales from the final sales:

Increase in accounts receivable = Final sales - Initial sales
Increase in accounts receivable = $6,120,000 - $4,110,000
Increase in accounts receivable = $2,010,000

Next, we can calculate the cost of funds tied up in accounts receivable by multiplying the increase in accounts receivable by the opportunity cost of funds:

Cost of funds tied up in accounts receivable = Increase in accounts receivable * Opportunity cost of funds
Cost of funds tied up in accounts receivable = $2,010,000 * 0.10
Cost of funds tied up in accounts receivable = $201,000

Therefore, the increased cost of funds tied up in accounts receivable is $201,000.