Question

Accounts receivable changes with bad debts - A firm is evaluating an accounts receivable change that would increase bad debts from2% to 3% of sales. Sales are currently 40,000 units, the selling price is $20 per unit, and the variable cost per unit is $15. As a result of the proposed change sales are forecast to increase to 70,000 units.

a. what are the bad debts in dollars currently and under proposed change?

b. calculate the cost of the marginal bad debts to the firm?

c. ignoring the additional profit contribution from increased sales, if the proposed change saves $3,500 and causes no change in the average investment in accounts receivable, would you recommend it?

d. considering all changes and benefits, would you recommend the proposed change?

e. compare and discuss your answers in parts c and d?

Answer 1

Solution - Given that current Sales - 40,000 unity The Selling price = $20 per unit Variable cost = $15 per unit changing sales = 70,000 unity Current Sales - 40,000 v 20.= 8,00,000 current bad debts @ 27. = 8,00,000* 200.000 $16,000 poopored saley - 70,000 x 15 =$1050000 35. = 1050000X proposed bad debts @ :.= $31500 6) cost of marginal bad debts to the firm = change in bad debts iie 1. 5-31,500 - 16,000 815,500 - $ 15,500 $3500 is much less than Savg save c) NO; As the proposed changy oposed change the proposed bad debts cost.

d) Increas in sale units = 70,000-40,000 = 30,000 units contribution spavc=20-15 = 5P.U Contribution value = 30,000 x 5 = 450,000 In coeak in bad debts = 15,500 - Net profit = 1,50,000 -15,500 21,34,500 $ - $ 1,34,500. so, considering all the changes in costs of benfits. there is as a benfit of change is recommended proposed $ 1,34,500 e) In pout c, it is insufficient saving to cover cost while in part D, it is sufficient to cover all the lost and hence from increased profit, cost can be covered.