Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Eden Exports, an importer and exporter of precious metals and jewelry from around the world, sells its objets d'art to stores in six western states

Eden Exports, an importer and exporter of precious metals and jewelry from around the world, sells its objets d'art to stores in six western states and
generates annual sales of $6,000,000. In response to increasing concerns regarding the firm's slow collections and elevated bad-debt ratios, Eden's
treasurer has suggested that the firm change its current collection policy. Specifically, he proposes that the firm progress beyond its current collection
efforts-sending late-payment notices and making follow-up telephone calls-and hire an outside professional collection agency. It is expected that the
collection agency will cost $40,000 and that the firm's sales and inventory requirements will be unaffected by the policy change.
To facilitate the evaluation of this proposal, the treasurer has had his assistant, Abigail, collect the following information and has asked you to
determine whether or not Eden should revise its collection policy:
Current Credit Data
Days sales outstanding (DSO)=95 days
Bad-debt losses =10% of sales
Contribution margin =25%
Return earned on any freed funds =14%
Forecasted Data for Revised Collection Policy
Days sales outstanding (DSO)70 days
Bad-debt losses =5% of sales
Bad-debt losses =5% of sales
Given this data and assuming that the revised collection policy is implemented, complete the following statements. (Note: Round your answers to the
nearest dollar.)
Eden's 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 firm's bad-debt losses is forecast to be
D. The expected net benefit associated with the revised policy is
Based on these findings, should Eden make the proposed change? Why or why not?
No, because the net benefit of the proposal is negative.
Yes, because the net benefit of the proposal is equal to or greater than $0.
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 firm's collection policy involves trade-offs. Which of the following statements regarding this process are true? Check all that apply.
A good collection policy is an expensive policy that results in an average collection period equal to the credit period and zero bad debts.
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 firm's losses due to uncollectible accounts.
Cost is not a relevant factor when setting or modifying a firm's 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.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Handbook Of The Fundamentals Of Financial Decision Making

Authors: Leonard C MacLean, William T Ziemba

1st Edition

9814417343, 978-9814417341

More Books

Students also viewed these Finance questions

Question

When are credits increases? When are credits decreases?

Answered: 1 week ago