Question

Question Help Accounts receivable changes without bad debts Tara's Textiles currently has credit sales of $363 million per year and an average collection period of 59 days Assume that the price of Tara's products is 560 per unit and that the variable costs are $55 per unit. The firm is considering an accounts receivable change that will result in a 20.3% increase in sales and a 19 2% increase in the average collection period No change in bad debts is expected the firm's equal risk opportunity cost on its investment in accounts receivables 142 (Note Use a 365 day year) a. Calculate the additional profit contribution from new sales that the firm will realize it makes the proposed change b. What marginal investment in accounts receivable will result? c. Calculate the cost of the marginal investment in accounts receivable d. Should the firm implement the proposed change? What other information would be helpful in your analysis? a. The additional profit contribution from the increase in sale units is (Round to the nearest dollar) Incorrect 1

Answer 1

	Current	Increase	New
Credit Sales	363.00		436.69
Selling Price	60.00		60.00
No. of units sold	6.05	20.30%	7.28
Avg. collection period	59.00	19.20%	70.33
(a)	Additional Profit Contribution			($)
	Additional Units sold		7.28-6.05	1.23
	Contribution p.u		60-55	5
	Additional Profit Contribution		1.23*5	6.14	Million
(b)	Marginal Investment in Accounts Receivable
			($)
	Current Accounts Receivables	363*59/365	58.68
	New Accounts Receivable	436.69*70.33/365	84.14
	Marginal Investment in A/R	84.14-58.68	25.47	Million
(c )	Cost of Marginal Investment in A/R
			($)
	Marginal Investment		25.47
	Cost on Investment		14.20%
	Cost of Marginal Investment in A/R		3.62	Million

(d) Conclusion :

The firm should implement the proposed change as the additional profit contribution is higher than marginal cost of investment in Accounts Receivable.

For analysis, other helpful information is :

Whether Suppliers are ready to increase their credit period so that the firm's operating cycle can run smoothly. If not, What are other cashflows that will help in maintaining smooth operating cycle.