Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in replaying credit extended to them. This policy results in lost sales of $10 million annually. Based on past experiance with these types of customers, the firm estimates that the average collection period would be a 90 days and that the bad-debt loss ratio would be 6 percent. The firm's variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax return (i.e., opporunity cost) on receivables investments is 20 percent. When converting form annual to daily or vice versa, assume there is a 365 days per year. If Bluegrass Disilleries extends credit to these (previously delinquent) customers, determine the incrase in the investment in receivables.
Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in replaying credit extended to them. This policy results in lost sales of $10 million annually. Based on past experiance with these types of customers, the firm estimates that the average collection period would be a 90 days and that the bad-debt loss ratio would be 6 percent. The firm's variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax return (i.e., opporunity cost) on receivables investments is 20 percent. When converting form annual to daily or vice versa, assume there is a 365 days per year. If Bluegrass Disilleries extends credit to these (previously delinquent) customers, determine the incrase in the investment in receivables.
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