22-5 Relaxing Collection Efforts

The Boyd Corporation has annual credit sales of $2 million. Current expenses for the collection department are $40,000, bad-debt losses are 2.00%, and the days sales outstanding is 36 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $25,000 per year. The change is expected to increase bad-debt losses to 3.00% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $2,250,000 per year. Should the firm relax collection efforts if the opportunity cost of funds is 12% , the variable cost ratio is 70%, and taxes are 40% ?