Question
Your company has credit sales in the amount of $200 million with an average collection period of 45 days. Price of your products is $100
Your company has credit sales in the amount of $200 million with an average collection period of 45 days. Price of your products is $100 per unit. Variable costs are $60 per unit. Management is weighing a change in accounts receivable that would cause a 15% increase in sales and a 15% increase in average collection period. No change in bad debts is anticipated. With a 365-day year, the equal-risk opportunity cost is estimated at 15%.
(A)Under the proposed change, determine the additional profit contribution from sales to be expected.
(B)Calculate the resulting marginal investment in accounts receivable.
(C)Calculate the cost of the marginal investment in accounts receivable.
(D)Determine from the above whether the company should make the proposed change in accounts receivable policy, and explain.
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