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?

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?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Conversion Cycle

Conversion cycle is also known as cash cycle or net operating cycle. Conversion cycle refers to how much time a company takes to turn its investments which is done from stock or any other financial resources into cash flows from sales.

Question

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.)

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Step 3: Determine the profit contribution from an increase in sales:

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