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John Company reported the following information for 2021 : All company sales are in credit. To boost its sales, the company is considering the following
John Company reported the following information for 2021 : All company sales are in credit. To boost its sales, the company is considering the following alternatives: Alternative A: Offer a more liberal credit term at net 45 which will increase the average collection period to 65 days but will increase annual credit sales by 25%. Due to the extension of the credit term, the expected bad debts losses will increase to 4% of the adjusted total credit sales. Additional collection expenses amount to $200,000. Additional fixed cost of $5,000,000 is required to support the higher sales volume. Alternative B: Allow a 2% discount under a 2/10, net 30 credit policy. Taking into account the percentage of customers availing the discount (40%), the average collection period will decrease to 30 days. The increase in annual credit sales is expected at 10\%. Bad debts losses will decrease to 1% of the adjusted total credit sales. Additional collection expenses amount to $300,000. Additional fixed cost necessary amount to $2,000,000. How much additional bad debts should the company record under Alternative A
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