Question
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
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?
Step by Step Solution
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Step: 1
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 ...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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