A Company sells glass containers.

It reported total sales of $1,580,000, with 60% of the sales on credit. It takes 60

days to collect accounts receivable. The selling price is $20 per container while the variable

cost is $15 per container. The board is currently investigating a change in the collection

of accounts receivable that is expected to result in a 20% increase in credit sales

and a 10% increase in the average collection period. Bad debts will also increase, from

2% to 4% of sales. The firm's opportunity cost on its investment in accounts receivable

is 12%. (Note: Use a 365-day year.)

a. Calculate bad debts in dollars for the current and proposed plans.

b. Calculate the cost of the marginal bad debts to Company?

c. Would you recommend the proposed plan? Explain.

d. Under what circumstances would the decision to implement the proposed plan change?

Answer rating: 100% (QA)

To solve this problem we need to calculate the various financial metrics for the current and proposed plans and then analyze the impact of the changes ... View the full answer