Question

Accounts receivable changes without bad debts Tara's Textiles Currently has credit sales of $359 million per year and an average collection period of 64 days Assume that the price of Tara's products is $60 per unit and that the variable costs are $54 per unit. The firm is considering an accounts receivable change that will result in a 202% increase in sales and a 19 6% 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 receivable is 14.6% (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 pot contribution from the increase in sale units iss Round to the nearest dollar) b. The marginal investment in accounts receivable is Round to the nearest domar) c. The cost of marginal investment in accounts receivables s o und to the nearest dollar d. Should the firm implement the proposed change? What other information would be helpful in your analysis? "The additional profitability of S7 251,796 exceeds the additional cost of $3.611 204 However, one would need estimates of bad debt expenses, chorical costs, and some information about the uncertainty of the sales forecast prior to adoption of the policy" Fa Overall Scores Is the above statement true or false? Select from the drop-down menu) False Enter your answer in each of the answer box

Answer 1

content credit sales - $359 oco ooo % increase in sales » 20.2% Total incease = $72 518000 I contribution a selling price variatle cost 60 - 54 - $6.00 contribution ration 6 =10% Additional profit contribution a $72 518000 X 10% $7,251,800, anoval Sales Average variable cost of rusren't s Sales & Cr-contribution ratio) a $ 359 000000 C1-0.10) a $323 100000 exposed Average = L Anoval credit soles : 35900000 & 72518cco - $431518000 variable rest of current Annual sales sales (epposed) Acha contribution margin ratio) u31518000 X Crol) $ 388 366 200 accounts receivable turnover = 365/Aug. collection period

= 365/64 I 5.7031 Proposed Accounts receivable root over a 365 64 +19.67. 365 76.54 a : 407685 Average investerany in accounts receivable (pesent) 323 100 000 $ 56653399.04 5:703! - $ 566 53400 (panded) Proposed 388366100 9.7685 181444116.1996 i $81444117 Rounded) marginal investment in Accounts receivable : 81444117-56653400 $ 24790717.00 cost of marginal investment in Arromis receivable 2479 0717 X 14.6%. $3619444.682 a $3619 uus (Rounded off) Additional Profit Condoi bulia $7,251,800 cost of marginal nrgement : $3,619, 445 in acrounds receivable Additional profit contribution generated is ligter than the cast of marginal investment in accounts receivable, there fore firm should implement the proposed change.

other factors helpful in analysis are s Increase in clerical costs s Estinction of bad debil as > uncertainty of the sales fore cast adoption of the Polity entic prior to