AICPA Exam CPA-Business Topic 2 Question 39 Discussion

Choice 'c' is correct. $120,000 benefit on the planned change in credit standards.

This question pertains to the economic benefit associated with a change in credit terms.

The question tells us that the credit sales will increase by $720,000 if we relax our credit terms. We know variable costs are 80%, so we will earn $144,000 as a result of the expanded sales. The 20% contribution margin is equal to the 20% opportunity cost so there is no better investment of our resources for the expanded credit sales relative to its margin.

What about the variable costs, though?

We have $576,000 in variable costs that will be outstanding, pro rata, 75 days of the year. So the resources we will use to produce our sales is 75/360ths of $576,000, or $120,000 at any given time during the year. These $120,000 in resources could earn 20% annual return or $24,000. The $24,000 opportunity cost, compared to the $144,000 margin results in a $120,000 benefit in relaxing credit terms.

Choices 'a', 'b', and 'd' are incorrect, per the above calculation/discussion.