Question

2. The Pettit Corporation has annual credit sales of $2 million. Current expenses for the collection...

2. The Pettit Corporation has annual credit sales of $2 million. Current expenses for the collection department are $30,000, bad debt losses are 2 percent, and the DSO is 30 days. Pettit is considering easing its collection efforts so that collection expenses will be reduced to $22,000 per year. The change is expected to increase bad debt losses to 3 percent and to increase the DSO to 45 days. In addition, sales are expected to increase to $2.2 million per year. Should Pettit relax collection efforts if the opportunity cost of funds is 12 percent, the variable cost ratio is 75 percent, and its marginal tax rate is 40 percent? All costs associated with production and credit sales are paid on the day of the sale.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Howlett Industries has annual credit sales of $120 million on terms of net 30. Current expenses...
Howlett Industries has annual credit sales of $120 million on terms of net 30. Current expenses for the collection department are running at 2.1 percent of sales, bad debt losses are 1.5 percent of sales, and the DSO is 38 days. Howlett is considering extending the credit period to 45 days. The change is expected to increase bad debt losses to 1.7 percent, increase the DSO to 51 days, and increase collection expenses to 2.3 percent of sales. Sales would...
Nguyen Brothers Inc. expects to have sales this year of $20 million under its current credit...
Nguyen Brothers Inc. expects to have sales this year of $20 million under its current credit policy. The present terms are net 45; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 4 percent. Since RBP wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 20 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to...
The credit terms of a firm currently is “net 30”. It is considering to change it...
The credit terms of a firm currently is “net 30”. It is considering to change it to “net 60”. This will have the effect of increase in firm’s sales. As the firm will not relax credit standards, the bad debt losses are expected to remain at same percentage, that is, 3% of sales. Incremental production, selling and collection costs are 80% of sales and expected to remain constant over the range of anticipated sales increases. The relevant opportunity cost for...
The Paden Corporation has annual sales of $92 million. The average collection period is 54 days....
The Paden Corporation has annual sales of $92 million. The average collection period is 54 days. What is the average investment in accounts receivable as shown on the balance sheet? (Use 365 days per year. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)      Average accounts receivable $    Essence of Skunk Fragrances, Ltd., sells 7,300 units of its perfume collection each...
A firm is considering relaxing its credit standards which will result in annual sales increasing from...
A firm is considering relaxing its credit standards which will result in annual sales increasing from $1.50 million to $2.02 million. Costs of goods sold represent 49 percent of sales and the average collection period is expected to increase from 32 to 56 days. If the firm requires a return of 10.9 percent, what the cost of investing in the extra accounts receivables from the planned relaxation of credit standards?
A firm is considering relaxing credit standards, which will result in annual sales increasing from $1.5...
A firm is considering relaxing credit standards, which will result in annual sales increasing from $1.5 million to $1.75 million, the cost of annual sales increasing from $1,000,000 to $1,125,000, and the average collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of sales. The firm’s required return on investments is 20 percent. The firm’s cost of marginal investment in accounts receivable is (a)$5,556. (b)$9,943....
The Newkirk Corporation has annual credit sales of $29 million. The average collection period is 34...
The Newkirk Corporation has annual credit sales of $29 million. The average collection period is 34 days. (Enter your answer as directed, but do not round intermediate calculations.) Required: What is the average investment in accounts receivable as shown on the balance sheet? (Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)   Average receivables $   
A firm currently has annual credit sales of $912,500 for which the average collection period is...
A firm currently has annual credit sales of $912,500 for which the average collection period is 30 days. If, in response to allowing the average collection period to increase to 40 days, sales increased by 10 percent, what would be the additional investment in accounts receivable? A. $26,800. B. $35,000. C. $26,000. D. None of the above.
(Accounts receivable collection policy) The Cowboy Bottling Company will generate $14 million in credit sales next...
(Accounts receivable collection policy) The Cowboy Bottling Company will generate $14 million in credit sales next year. Collection of these credit sales will occur evenly over this period. The firm's employees work 300 days a year. Currently, the firm's processing system ties up 5 days' worth of remittance checks. A recent report from a financial consultant indicated procedures that will enable Cowboy Bottling to reduce processing float by 1 full days. If Cowboy invests the released funds to earn 8...
Shortening the credit period ---------- A firm is contemplating shortening its credit period from 40 to...
Shortening the credit period ---------- A firm is contemplating shortening its credit period from 40 to 30 days and believes​ that, as a result of this​ change, its average collection period will decline from 45 to 38 days. Bad-debt expenses are expected to decrease from 1.6% to 1.1% of sales. The firm is currently selling 12,500 units but believes that as a result of the proposed​ change, sales will decline to 10,600 units. The sale price per unit is $57​,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT