Unformatted text preview: sed plan
Average investment under present plan
Marginal investment in accounts receivable
Required return on investment
Cost of marginal investment in A/R $47,250
$ 2,588 The resulting value of $2,588 is considered a cost because it represents the maximum amount that could have been earned on the $17,250 had it been placed in
the best equal-risk investment alternative available at the firm’s required return
on investment of 15%.
Cost of Marginal Bad Debts The cost of marginal bad debts is found by taking
the difference between the levels of bad debts before and after the proposed relaxation of credit standards.
Cost of marginal bad debts
Under proposed plan: (0.02 $10/unit 63,000 units)
Under present plan: (0.01 $10/unit 60,000 units)
Cost of marginal bad debts $12,600
$ 6,600 Note that the bad-debt costs are calculated by using the sale price per unit ($10)
to deduct not just the true loss of variable cost ($6) that results when a customer
fails to pay its account, but...
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