Melody Kulp of Mellies (see chapter’s opening feature) is aware of Robin Drucker, who operates a collection agency. For a 50% commission, Drucker collects on accounts receivables for her clients’ customers who are delinquent in their payments. For example, assume that a company turns over a \($100\) accounts receivable to Drucker. If she can collect the \($100\) from the customer, Drucker keeps \($50\) and remits the other \($50\) to her client. Kulp is negotiating with Drucker to offer her a dis¬ count from the normal 50% commission that Drucker charges. Kulp has proposed a fee of 40% on amounts collected by Drucker, and leaving 60% of the receivable for Mellies. Currently, Mellies uses a different collection agency that charges a 50% commission.

Required
1. Why would a company hire a collection agency to pursue its accounts receivable?
2. Assume that Mellies’ profit margin is 8%. What is Mellies’ net income on sales of \($40\) million?
3. Assume that Mellies currently pays 2% of its \($40\) million sales to collection agencies. What is the current amount of commission expense Mellies pays to collect delinquent accounts?
4. If Mellies is able to successfully negotiate with the Drucker agency for the reduced collection fee, how will its commission expense for collecting accounts change?
5. How would Mellies’ profit margin change if it hires the Drucker collection agency at a 40% commission?