Sales are expected to increase by 5 or 3000 units the

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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: Average investment in accounts receivable Total variable cost of annual sales Turnover of accounts receivable (14.9) where 360 Aver...
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