2. Evaluation of a proposed change in the firm's collection policy

Consider the case of Alexis Enterprises:

Alexis Enterprises, an importer and exporter of precious metals and jewelry from around the world, sells its objets dart to stores in six northeastern states and generates annual sales of $4,500,000. In response to increasing concerns regarding the firms slow collections and elevated bad-debt ratios, Alexiss treasurer has suggested that the firm change its current collection policy. Specifically, he proposes that the firm progress beyond its current collection effortssending late-payment notices and making follow-up telephone callsand hire an outside professional collection agency. It is expected that the collection agency will cost $30,000 and that the firms sales and inventory requirements will be unaffected by the policy change.

To facilitate the evaluation of this proposal, the treasurer has had his assistant, Kaitlin, collect the following information and has asked you to determine whether or not Alexis should revise its collection policy:

Current Credit Data	Forecasted Data for
	Revised Collection Policy
Days sales outstanding (DSO)= 95 days	Days sales outstanding (DSO)= 70 days
Bad-debt losses = 10% of sales	Bad-debt losses = 5% of sales
Contribution margin = 25%
Return earned on any freed funds = 14%

Given this data and assuming that the revised collection policy is implemented, complete the following statements:

Note: Round your intermediate calculation to whole number. Assume 365 days in a year.

	A. Alexiss accounts receivable investment is expected to change by: .
	B. The marginal income earned on any freed funds is expected to be: .
	C. The change in the firms bad-debt losses is forecast to be: .
	D. The expected net benefit associated with the revised policy is: .

Based on these findings, should Alexis make the proposed change? Why or why not?

Yes, because the net benefit of the proposal is equal to or greater than $0.

No, because the net benefit of the proposal is negative.

Yes, because the net benefit of the proposal is negative.

No, because the net benefit of the proposal is equal to or greater than $0.

Setting a firms collection policy involves trade-offs. Which of the following statements regarding this process are true? Check all that apply.

Setting a lax collection policy will result in added costs and often will not increase the speed at which the collections are received nor reduce the firms losses due to uncollectible accounts.

A good collection policy is an expensive policy that results in an average collection period equal to the credit period and zero bad debts.

Cost is not a relevant factor when setting or modifying a firms collection policy.

Setting an overly aggressive collection policy runs the risk of alienating good customers who may be going through relatively minor and brief cash flow difficulties.