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FINANCIAL ACCOUNTING
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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Accounts receivable changes Tara's Textiles currently has credit sales of $23 million per month, an average collection period of 55 days, and bad debts equal to 4% of sales. Assume that the price of Tara's products is $58 per unit and that the variable costs are $53 per unit. The firm is considering tightening up their credit policy, allowing customers 34 days rather than 55 to pay their bills. With a stricter credit policy in place, sales will fall by 10%, but the average collection period will drop to 34 days and the bad debts percentage will fall to 1%. Determine whether the company should make this change if their cost of capital is 1.1% per month. (Note: Use a 365-day year.) The cost from a decrease in sales is $ (Round to the nearest dollar.)
Transcribed Image Text:Accounts receivable changes Tara's Textiles currently has credit sales of $23 million per month, an average collection period of 55 days, and bad debts equal to 4% of sales. Assume that the price of Tara's products is $58 per unit and that the variable costs are $53 per unit. The firm is considering tightening up their credit policy, allowing customers 34 days rather than 55 to pay their bills. With a stricter credit policy in place, sales will fall by 10%, but the average collection period will drop to 34 days and the bad debts percentage will fall to 1%. Determine whether the company should make this change if their cost of capital is 1.1% per month. (Note: Use a 365-day year.) The cost from a decrease in sales is $ (Round to the nearest dollar.)
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