2010-12-14_005945_baddebt - Accounts receivable changes...

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Accounts receivable changes with bad debts. A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the variable cost per unit is $15. As a result of the proposed change, sales are forecast to increase to 60,000 units. a. What are bad debts in dollars currently and under the proposed change? Current bad debts Sales (50,000 x $20) 1,000,000 Bad debts (2% of sales) 20,000 Proposed change Sales (60,000 x 20) 1,200,000 Bad debts (4% of sales) 48,000 b. Calculate the cost of the marginal bad debts to the firm. The cost of marginal bad debts = change in bad debts = 48,000 - 20,000 = $28,000 c. Ignoring the additional profit contribution from increased sales, if the proposed change saves $3,500 and causes no change in the average investment in accounts receivable, would you recommend it? Explain. d. Considering all changes in costs and benefits, would you recommend the
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2010-12-14_005945_baddebt - Accounts receivable changes...

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