The Dream Corp has annual credit sales of $2 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 50 days. In addition, sales are expected to increase to $2.2 million per year. Should the firm relax collection efforts if the opportunity cost of funds is 12%, the variable cost ratio is 80%, and taxes are 25%? Yes, profits grow by $19,860 No, profits fall by $963 No, profits fall by $9,075 Yes, profits grow by $2,548
The Dream Corp has annual credit sales of $2 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 50 days. In addition, sales are expected to increase to $2.2 million per year. Should the firm relax collection efforts if the opportunity cost of funds is 12%, the variable cost ratio is 80%, and taxes are 25%? Yes, profits grow by $19,860 No, profits fall by $963 No, profits fall by $9,075 Yes, profits grow by $2,548
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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The Dream Corp has annual credit sales of $2 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 50 days. In addition, sales are
expected to increase to $2.2 million per year.
Should the firm relax collection efforts if the opportunity
cost of funds is 12%, the variable cost ratio is 80%, and
taxes are 25%?
Yes, profits grow by $19,860
No, profits fall by $963
No, profits fall by $9,075
Yes, profits grow by $2,548
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