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Unformatted text preview: does not hold the
safety stock: (1) order cost, (2) carrying cost, (3) total inventory cost, (4)
reorder point, (5) economic order quantity. Explain. LG4 14–7 Accounts receivable changes without bad debts Tara’s Textiles currently has
credit sales of $360 million per year and an average collection period of 60 days.
Assume that the price of Tara’s products is $60 per unit and that the variable
costs are $55 per unit. The firm is considering an accounts receivable change
that will result in a 20% increase in sales and a 20% increase in the average collection period. No change in bad debts is expected. The firm’s equal-risk opportunity cost on its investment in accounts receivable is 14%.
a. Calculate the additional profit contribution from new sales that the firm will
realize if it makes the proposed change.
b. What marginal investment in accounts receivable will result?
c. Calculate the cost of the marginal investment in accounts receivable.
d. Should the firm implement the proposed chan...
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