Problems:2Table 15.5

Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 10% from 300 canoes per year to 330 canoes per year. The average collection period is expected to increase to 50 days from 40 days and bad debts are expected to double the current 1% level.The price per canoe is $850, the variable cost per canoe is $700 and the average cost per unit at the 300 unit level is $750.The firm's required return on investment is 20%. (Assume a 360 dayyear)

1. What is the firm's additional profit contribution from sales under the proposed relaxation of credit standards? (see Table 15.5)
2. What is the firm's level of accounts receivable before relaxing the credit standards? (Note: For this purpose and for ( c) below, measure sales at average variable cost, not the selling price).
3. What is the cost of marginal investments in accounts receivable under the proposed plan? (see Table 15.5) (see note to (b) above)
4. What is the cost of marginal bad debts under the proposed plan? (see table 15.5)
5. What is the net result of implementing the proposed plan? (see table 15.5)