Unformatted text preview: expected to increase sales to $510,000. Bad-debt
expenses will increase from 1% to 1.5% of sales. The firm has a required rate of
return on equal-risk investments of 20%.
a. What additional profit contribution from sales will be realized from the proposed change?
b. What is the cost of the marginal investment in accounts receivable?
c. What is the cost of the marginal bad debts?
d. Do you recommend this change in credit terms? Why or why not? LG6 14–13 Float Simon Corporation has daily cash receipts of $65,000. A recent analysis
of its collections indicated that customers’ payments were in the mail an average
of 2.5 days. Once received, the payments are processed in 1.5 days. After payments are deposited, it takes an average of 3 days for these receipts to clear the
a. How much collection float (in days) does the firm currently have?
b. If the firm’s opportunity cost is 11%, would it be economically advisable for
the firm to pay an annual fee of $16,500 to reduce collection float by 3 days?
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