Relaxing Collection Efforts

The Boyd Corporation has annual credit sales of $2.17 million. Current expenses for the collection department are $42,000, bad-debt losses are 1.7%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $20,000 per year. The change is expected to increase bad-debt losses to 2.7% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $2,195,000 per year. Suppose that the opportunity cost of funds is 25%, the variable cost ratio is 79%, and taxes are 40%. Assuming a 365-day year, calculate the cost of carrying receivables under the current policy and the new policy. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.

Current policy: $

New policy: $

Should the firm relax collection efforts?

-Select-The firm should relax its collection efforts. OR The firm should not relax its collection efforts.