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A1 fx Karen's Canoes A B C D E F G H Karen's Canoes 2 Income Statement 3 4 INCOME STATEMENT No Change % of Sales With Change Assumptions Sales 100.00% Given Variable Costs Material Labor Overhead (Variable Portion) Selling Expense Collection Exp (Variable Portion) Total Variable Costs Total Fixed Costs Profit before Credit Costs Opportunity Cost of Investment in A/R Opportunity Cost of Investment in Inv Opportunity Cost of Bad Debts Expense EBT \begin{tabular}{|c|c|c|c|c|c|} \hline \multirow[t]{2}{*}{ No Change } & % of Sales & With Change & Assumptions & & \\ \hline & 100.00% & & Given & & \\ \hline & & & & & \\ \hline & & & & & \\ \hline & & & & & \\ \hline & & & & & \\ \hline & & & & & = \\ \hline & & & & & \\ \hline & & & & & \\ \hline & & & & & \\ \hline & & & & & \\ \hline & & & & 1) & \\ \hline & & & & & \\ \hline & & & See below & 2) & \\ \hline & & & See below & 3) & \\ \hline & & & 2x per problem & 4) & Bad debt % \\ \hline & & & & & \\ \hline & & & & & \\ \hline DSO * & Sales/Day * & Var Cost Ratio * & Cost of Funds = & Total & \\ \hline Change in Sales * & COGS \%/ & Annual Inv T/O & Cost of Funds = & Total & \\ \hline & & & & & \\ \hline & & & & & \\ \hline & & & & & \\ \hline \end{tabular} Opportunity Cost of Investment in A/R = Old Policy New Policy Opportunity Cost of Investment in Inventory = New Policy Assignment: Determine the expected change in before-tax profit for the proposed change in credit standards. Prepare the income statements in total, not per unit. The following information should be used in your analysis. 1. Sales occur evenly throughout the year. 2. The firm is currently operating under-capacity. 3. Opportunity cost of Inventory Investment= Change in Annual Sales x COGS \% X r Annual Inventory Turnover Karen's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15% from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current level (as a \% of sales). To support the higher sales level, an increase in the level of inventory will be necessary. The firm's required return on investment is 6% and their annual inventory turnover is 3 times. Their COGS \% is 58.33%. The current standard cost data is shown below