This preview shows page 1. Sign up to view the full content.
Unformatted text preview: are “sunk” and
therefore are unaffected by a change in the sales level, the only cost relevant to a CHAPTER 14 Working Capital and Current Assets Management 613 change in sales is variable costs. Sales are expected to increase by 5%, or 3,000
units. The profit contribution per unit will equal the difference between the sale
price per unit ($10) and the variable cost per unit ($6). The profit contribution
per unit therefore will be $4. The total additional profit contribution from sales
will be $12,000 (3,000 units $4 per unit).
Cost of the Marginal Investment in Accounts Receivable To determine the cost
of the marginal investment in accounts receivable, Dodd must find the difference
between the cost of carrying receivables under the two credit standards. Because
its concern is only with the out-of-pocket costs, the relevant cost is the variable
cost. The average investment in accounts receivable can be calculated by using
the following formula:
in accounts receivable Total variable cost of annual sales
Turnover of accounts receivable (14.9) where
View Full Document