Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 22, Problem 5P
Relaxing Collection Efforts
The Boyd Corporation has annual credit sales of $1.6 million. Current expenses for the collection department are $35,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $22,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $1,625,000 per year.
Should the firm relax collection efforts if the
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The Tortuga Corp has annual credit sales of $2.5 million. Current expenses for the
collection department are $40,000, bad-debt losses are 1.5%, and the days sales
outstanding is 35 days. The firm is considering easing its collection efforts such that
collection expenses will be reduced to $18,000 per year. The change is expected to
increase bad-debt losses to 2.5% and to increase the days sales outstanding to 61 days. In
addition, sales are expected to increase to $2.6 million per year.
Should the firm relax collection efforts if the opportunity cost of funds is 16%, the variable
cost ratio is 75%, and taxes are 25%?
O No, profits fall by $2.907
O No, profits fall by $5.509
Yes, profits grow by $2,907
O Yes, profits grow by $5,509
The Fierro Corporation has annual credit sales of $6 million. Current expenses for the collection department are $100,000, bad debt losses are 4 percent, and the days sales outstanding is 30 days. Fierro is considering easing its collection efforts so that collection expenses will be reduced to $50,000 per year. The change is expected to increase bad debt losses to 7 percent and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $8 million per year.
Should Fierro relax collection efforts, if the opportunity cost of funds is 10 percent, the variable cost ratio is 75 percent, and its marginal tax rate is 30 percent? All costs associated with production and credit sales are paid on the day of the sale.
The Boyd Corporation has annual credit sales of $2.8 million. Current expenses for the collection department are $38,000,
bad debt losses are 1.6%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts
such that collection expenses will be reduced to $23,000 per year. The change is expected to increase bad - debt losses to
2.6% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $2,825,000 per year.
Suppose that the opportunity cost of funds is 18%, the variable cost ratio is 65%, and taxes are 40%. Assuming a 365-day
year, calculate the cost of carrying receivables under the current policy and the new policy. Enter your answers as
positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.
Chapter 22 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 22 - Prob. 1QCh. 22 - Prob. 2QCh. 22 - Is it true that if a firm calculates its days...Ch. 22 - Firm A had no credit losses last year, but 1% of...Ch. 22 - Indicate by a (+), (), or (0) whether each of the...Ch. 22 - Cost of Bank Loan On March 1, Minnerly Motors...Ch. 22 - Cost of Bank Loan Mary Jones recently obtained an...Ch. 22 - Del Hawley, owner of Hawleys Hardware, is...Ch. 22 - Gifts Galore Inc. borrowed 1.5 million from...Ch. 22 - Relaxing Collection Efforts The Boyd Corporation...
Ch. 22 - Tightening Credit Terms Kim Mitchell, the new...Ch. 22 - Effective Cost of Short-Term Credit Yonge...Ch. 22 - Monitoring of Receivables
The Russ Fogler Company,...Ch. 22 - Prob. 10PCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MCCh. 22 - Prob. 6MCCh. 22 - Prob. 7MCCh. 22 - Assume that it is now July of Year 1 and that the...Ch. 22 - Now assume that it is several years later. The...Ch. 22 - Prob. 10MCCh. 22 - Prob. 11MCCh. 22 - Prob. 12MCCh. 22 - Prob. 13MCCh. 22 - Prob. 14MCCh. 22 - Suppose the firm makes the change but its...
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- Accounts receivable changes with bad debts A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 3% of sales. Sales are currently 50,000 units per month, 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 80,000 units per month. If the cost of capital is 0.75% per month, should the firm change its credit policy? The cost of the marginal bad debts of the firm is $ 28000. (Round to the nearest dollar.) The profit contribution from an increase in sales is $ (Round to the nearest dollar.)arrow_forwardTo increase sales, management is considering reducing its credit standards. This action is expected to increase sales by $120,000. Unfortunately, it is anticipated that 7 percent of the sales will be uncollectible. Accounts receivable turnover is expected to be seven times a year, and it costs the firm 11 percent to carry its receivables. Collection costs will be 4 percent of sales, and the cost of the additional goods sold is $62,000. Will earnings increase? Round your answer to the nearest dollar. Net in earnings is $ .arrow_forwardThe Sandbox Company is planning to increase its level of collection expenditures form the current P250,000 to P400,000, on credit sales of P24,000,000. This move is expected to accelerate payments and increase turnover of receivables from 8 to 12 times and cut bad debts from two percent to one percent of credit sales. The opportunity cost of funds is 12 percent. The company uses a 360-day year in planning and controlling. Required: Calculate the following (show your solution): 1. Receivables turnover before and after the change in the collection policy. 2. Average receivable balance before and after the change in collection policy. 3. Net advantage or disadvantage of the new collection policyarrow_forward
- Edward 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 10,000 to 11,000 units during the coming year, the Average Collection Period is expected increase from 45 to 60 days; and Bad Debts are expected to increase from 1% to 3% of sales. The Sale Price per unit is $40, and the Variable Cost per unit is $31. The firm’s required on equal-risk investment is 25%. A. What is the Net Gain or Los from implementing the Proposed Plan? (Format: 1,111 G or 1,111 L) B. Would you recommend the Proposed Relaxation? (Format: Yes or No)arrow_forwardBRLM Company is planning to relax its credit standards to boost sales. As a result, sales are expected to increase 16 percent from 3,000 units per year to 3,480 units per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1.5 percent level. The price per unit is P4,250, the variable cost per unit is P3,060. The firm’s required return on investment is 20 percent.What is the cost of marginal bad debts under the proposed plan? Group of answer choices P168,300 P19,445 P38,838 P258,923 What is the net result of implementing the proposed plan? Group of answer choices –P312,474 +P168,274 +P319,260 –P168,274arrow_forwardLewis 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 5% from 10,000 to 10,500 units during the coming year; the average collection period is expected to increase from 40 to 55 days; and bad debts are expected to increase from 2% to 4% of sales. The sale price per unit is $39, and the variable cost per unit is $29. The firm's required return on equal-risk investments is 9.4%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note:Assume a 365-day year.) a. the cost from the increased marginal investment in A/R is? (round to nearest dollar) b. the cost from an increase in bad debts.? (round to nearest dollar) c. compute the net profit from the proposed plan.arrow_forward
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