15 2588 the resulting value of 2588 is considered a

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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 30,000 $17,250 0.15 $ 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 6,000 $ 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...
View Full Document

Ask a homework question - tutors are online