Kitchen Enterprises is evaluating a proposal to lengthen its credit period from 30 to 45 days. All customers will continue to pay on the net date. Currently, credit sales are $650,000 and variable costs are $455,000. The selling price is $20 per unit. The proposal is expected to lead to credit sales of $710,000. However, bad debts are expected to increase from 1% to 2% of sales. The required rate of return on equal-risk investments is 16.5%. (Note: Assume a 365-day year.) 1) Calculate the additional profit contribution from sales if the proposal is implemented. 2) Calculate the cost of the marginal bad debts. 3) Should the proposal be implemented? Explain.

Kitchen Enterprises is evaluating a proposal to lengthen its credit period from 30 to 45 days. All customers will continue to pay on the net date. Currently, credit sales are $650,000 and variable costs are $455,000. The selling price is $20 per unit. The proposal is expected to lead to credit sales of $710,000. However, bad debts are expected to increase from 1% to 2% of sales. The required rate of return on equal-risk investments is 16.5%. (Note: Assume a 365-day year.) 1) Calculate the additional profit contribution from sales if the proposal is implemented. 2) Calculate the cost of the marginal bad debts. 3) Should the proposal be implemented? Explain.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 33P

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