Accounts receivable changes without bad debts Tara’s Textiles currently has credit sales of $360 million per...

50.1K

Verified Solution

Question

Finance

Accounts receivable changes without bad debts Tara’s Textilescurrently has credit sales of $360 million per year and an averagecollection period of 60 days. Assume that the price of Tara’sproducts is $60 per unit and that the variable costs are $55 perunit. The firm is considering an accounts receivable change thatwill result in a 20% increase in sales and a 20% increase in theaverage col-lection period. No change in bad debts is expected. Thefirm’s equal-risk oppor-tunity cost on its investment in accountsreceivable is 14%. (Note: Use a 365-day year.) a. Calculate theadditional profit contribution from sales that the firm willrealize if it makes the proposed change. b. What marginalinvestment in accounts receivable will result? c. Calculate thecost of the marginal investment in accounts receivable. d. Shouldthe firm implement the proposed change? What other informationwould be helpful in your analysis?

Answer & Explanation Solved by verified expert

4.3 Ratings (816 Votes)

a Sales quantity 36060 6 million units Contribution margin Sales Variable costNumber of units sold Increase in sales quantity 600000020 1200000 Contribution margin per unit 6055 5 Additional contribution 6000000 The additional profit contribution from sale which the See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Accounts receivable changes without bad debts Tara’s Textilescurrently has credit sales of $360 million per year and an averagecollection period of 60 days. Assume that the price of Tara’sproducts is $60 per unit and that the variable costs are $55 perunit. The firm is considering an accounts receivable change thatwill result in a 20% increase in sales and a 20% increase in theaverage col-lection period. No change in bad debts is expected. Thefirm’s equal-risk oppor-tunity cost on its investment in accountsreceivable is 14%. (Note: Use a 365-day year.) a. Calculate theadditional profit contribution from sales that the firm willrealize if it makes the proposed change. b. What marginalinvestment in accounts receivable will result? c. Calculate thecost of the marginal investment in accounts receivable. d. Shouldthe firm implement the proposed change? What other informationwould be helpful in your analysis?