Detailed Answer
Answer (C) is correct. The annual cost of Red’s financing arrangement can be calculated as follows: Annual cost = Interest expense on average balance + Commitment fee on unused portion = (Average balance × Stated rate) + [(Credit limit – Average balance) × Commitment fee %] = ($100,000 × 6%) + [($300,000 – $100,000) × 0.5%] = $6,000 $1,000 = $7,000