Certified Management Accountant Practice Exam

The calculation for the cost of increased investment in receivables specifically focuses on understanding how changes in the average collection period impact the overall costs associated with investing in accounts receivable. When evaluating this cost, it is essential to consider the additional working capital tied up in receivables due to longer collection times.

The correct approach involves taking the incremental variable costs and then adjusting it to reflect the impact of an extended collection period, expressed as a fraction of the total days in a year. By multiplying the incremental variable costs by the ratio of the incremental average collection period to the total days in the year, we derive a tangible measure of the cost incurred for each additional day that funds are locked in receivables due to the longer collection duration. This approach effectively helps managers evaluate the financial implications of credit and collection practices.

The other options do not accurately reflect the calculation needed to assess the cost of increased investment in receivables in relation to collection periods. For instance, simply multiplying incremental variable costs by the total days in a year overlooks the critical aspect of how the average collection period influences costs. Similarly, dividing net credit sales by average accounts receivable provides a turnover ratio rather than a cost figure, and multiplying average accounts receivable by interest rate does not account