Question
Kitchen Enterprises is evaluating a proposal to lengthenits credit period from 30 to 45 days. All customers will continue to pay on the netdate. Currently,
Kitchen Enterprises is evaluating a proposal to lengthenits credit period from 30 to 45 days. All customers will continue to pay on the netdate. Currently, credit sales are $650,000, while variable costs are $455,000. The selling price is $20 per unit. The proposal is expected to lead to credit sales of $710,000. However, bad debts are expected to increase from 1% to 2% of sales. The requiredrate of return on equal-risk investments is 16.5%. (Note: Assume a 365-day year.)
a. Calculate the additional profit contribution from sales if the proposal is
implemented.
b. Calculate the cost of the marginal investment in accounts receivable.
c. Calculate the cost of the marginal bad debts.
d. Should the proposal be implemented? Explain.
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