Question

A firm plans to make a change that will increase sales from 90,000 units to 98,000...

A firm plans to make a change that will increase sales from 90,000 units to 98,000 knapsacks and increase its average collection period from 30 days to 45 days. The price per knapsack is $34 and the variable cost per knapsack is $21. The required return on similar-risk investments is 13%.

1.What is the additional profit contribution from sales if the change is made?

2.What is the cost of the marginal investment in accounts receivable for this change?

3.What is the net profit from this change?

4.Should the firm make the change? Explain.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Additional profit contribution =( proposed sale units - current sale units) * (price per unit - variable cost) = (98000-90000)*(34-21) = 8000*13 = 104000

Average investment in accounts receivable = Total variable cost of annual sales/ Turnover of accounts receivable = Number of sales units * variable cost per unit/365/Average collection period

Under present plan, average investment = 90000*21/365/30 = 155342.466

Under proposed plan, average investment = 98000*21/365/45 = 253726.027

Marginal investment = 253726.027 - 155342.466 = 98383.561

Cost of marginal investment = 98383.561*13% = 12789.8629

The additional profit contribution of 104000 exceeds the cost of marginal investment by 104000-12789.8629 = 91210.1371. The firm should make the change as the benefit outweighs the costs.

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
Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a...
Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed? relaxation, sales are expected to increase by 10?% from 14,000 to 15,400 units during the coming? year; the average collection period is expected to increase from 45 to 55 days; and bad debts are expected to increase from 2.5?% to 44% of sales. The sale price per unit is $38?, and the variable cost per unit is $28.The? firm's required...
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....
A firm is contemplating shortening its credit period from 40 to 30 days and believes that,...
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 36 days. Bad-debt expenses are expected to decrease from 1.5% to 1% of sales. The firm is currently selling 12,000 units but believes that as a result of the proposed change, sales will decline to 10,000 units. The sale price per unit is $56, and the variable cost per...
Lengthening the credit period???Parker Tool is considering lengthening its credit period from 30 to 60 days....
Lengthening the credit period???Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills ?$460,000 for sales and has $?315,000 in variable costs. The change in credit terms is expected to increase sales to ?$540,000. ? Bad-debt expenses will increase from 1?% to 1.5?% of sales. The firm has a required rate of return on? equal-risk investments of 20?%. ? (Note?: Assume a? 365-day...
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​,...
A firm is contemplating shortening its credit period from 40 to 30 days and believes that...
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 36 days. Bad debt expenses are expected to decrease from 1.5% to 1% of sales. The firm is currently selling 12,000 units but believes that as a result of the proposed changes, sales will decline to 10,000 units. The sale price per unit of $56, and the variable cost...
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...
A firm is considering several policy changes to increase sales. It will increase the variety of...
A firm is considering several policy changes to increase sales. It will increase the variety of goods it keeps in inventory, but this will increase inventory by $12,000. It will offer more liberal sales terms, but this will result in average receivables increasing by $69,000. These actions are expected to increase sales by $820,000 per year, and cost of goods will remain at 80% of sales. Because of the firm’s increased purchases for its own production needs, average payables will...
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...
Derby Company has sales of $300,000 and profit margin of 9%. It pays $18,000 as dividends....
Derby Company has sales of $300,000 and profit margin of 9%. It pays $18,000 as dividends. Its assets total $200,000 and total equity is $120,000. Calculate its sustainable growth rate. A firm with annual sales of $450 million cut its average collection period from 60 days to 45 days. By how much is the accounts receivable balance change? Indicate decrease by negative and write answer in millions of dollars.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT