[Mike]

I’m having some trouble understanding the calculations to determine pretax cost of carrying additional accounts receivable (that result from a relaxation in credit policies, for example).
Conceptually, I understand that having additional accounts receivable represents an opportunity cost which can be calculated by taking the increase in AR and multiplying by the rate that the funds can be invested at.
Becker problems add the additional step of multiplying by the company’s variable cost ratio. Can anyone explain this component? Thanks in advance.