The cost of carrying the additional investment in accounts receivable is 12% of 70% of the increase in the average accounts receivable balance. The increase in accounts receivable is $17,761.
The new average accounts receivable balance is $47,342, which is calculated as:
$432,000 in sales divided by the accounts receivable turnover of 9.125 (365 days divided by the collection period of 40 days).
The old average accounts receivable balance is $29,581, which is calculated as:
$360,000 in sales divided by the accounts receivable turnover of 12.17 (365 days divided by the collection period of 30 days).
The difference between the old and new accounts receivable balances is an increase of $17,761 (old = $29,581, new = $47,342), and this incremental amount is used to calculate the increased carrying cost.
Increased carrying cost = (0.12)(0.7)($17,761) = $1,492.If someone can help me to understand the above question concept, please?
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