The Boyd Corporation has annual credit sales of $1.95 million. Current expenses for the collection department...

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The Boyd Corporation has annual credit sales of $1.95 million.Current expenses for the collection department are $31,000,bad-debt losses are 1.7%, and the days sales outstanding is 30days. The firm is considering easing its collection efforts suchthat collection expenses will be reduced to $25,000 per year. Thechange is expected to increase bad-debt losses to 2.7% and toincrease the days sales outstanding to 45 days. In addition, salesare expected to increase to $1,975,000 per year. Suppose that theopportunity cost of funds is 19%, the variable cost ratio is 80%,and taxes are 40%. Assuming a 365-day year, calculate the cost ofcarrying receivables under the current policy and the new policy.Enter your answers as positive values. Do not round intermediatecalculations. Round your answers to the nearest dollar. Currentpolicy: $ New policy: $ Should the firm relax collectionefforts?

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4.1 Ratings (688 Votes)

		Current Policy	New Policy
1)	Sales	$ 19,50,000	$19,75,000
	Contribution margin at (100%-80% = 20%)	$ 3,90,000	$ 3,95,000
	Increase in contribution margin [1]			$ 5,000
2)	Receivables:
	= 1950000*30/365 =	$ 1,60,274
	= 1975000*45/365 =		$ 2,43,493
	Investment in receivables at 80%	$ 1,28,219	$ 1,94,795
	Increase in investment		$ 66,575
	Cost of carrying receivables at 19% [2]			$ 12,649
3)	Collection costs	$ 31,000	$ 25,000	$ 6,000
4)	Bad debts expense	$ 33,150	$ 53,325
	Increase in bad debts [3]			$ 20,175
5)	Incremental pretax income = [1]+[3]-[2]-[4]			$ -21,824
6)	Tax at 40%			$ -8,730
	After tax incremental loss			$ -13,095
6)	The firm should not introduce the new policy as it would result in incremental pretax loss of $21,824 &
	incremental after tax loss of $13,095.

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The Boyd Corporation has annual credit sales of $1.95 million.Current expenses for the collection department are $31,000,bad-debt losses are 1.7%, and the days sales outstanding is 30days. The firm is considering easing its collection efforts suchthat collection expenses will be reduced to $25,000 per year. Thechange is expected to increase bad-debt losses to 2.7% and toincrease the days sales outstanding to 45 days. In addition, salesare expected to increase to $1,975,000 per year. Suppose that theopportunity cost of funds is 19%, the variable cost ratio is 80%,and taxes are 40%. Assuming a 365-day year, calculate the cost ofcarrying receivables under the current policy and the new policy.Enter your answers as positive values. Do not round intermediatecalculations. Round your answers to the nearest dollar. Currentpolicy: $ New policy: $ Should the firm relax collectionefforts?