Question
Forrester Fashions has monthly credit sales of 29,000 units with an average collection period of 55 days. The company has a per-unit variable cost of
Forrester Fashions has monthly credit sales of 29,000 units with an average collection period of 55 days. The company has a per-unit variable cost of 20 and a per-unit sale price of 31. Bad debts currently are 4% of sales. The firm estimates that a proposed relaxation of credit standards would increase the average collection period to 83 days and would increase bad debts to 7% of sales, which would rise to 43,500 units per month. Forrester's cost of capital is 1.2% per month. Show all necessary calculations needed to evaluate Forrester's proposed relaxation of credit standards.
(Note: Assume a 365-day year.)
a. The additional profit contribution from an increase in sales is $? (Round to the nearest dollar.)
b. The cost from the increased marginal investment in A/R is $? (Round to the nearest dollar.)
c. The cost from the increase in bad debts is $? (Round to the nearest dollar.)
d.The net profit or loss from implementing the proposed plan is $? (Round to the nearest dollar. Enter a negative number for a loss.)
e. Is the proposed plan recommended?
Yes or No?
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