Karen\'s conoes is considering relaxing its credit standards to encourage more s
ID: 2488538 • Letter: K
Question
Karen's conoes is considering relaxing its credit standards to encourage more sales. as a result, sales are expected to increase 15% from 300 conoes per year to 345 conoes per year. The average collection periods expected to increase to 40 days from 30 days and bad debts are expected to double the current level (as a % of sales). In order to support the higher sales level, an increase in the level of inventory will be necessary. The firm's required return on investment is 20% and their inventory turnover is 3 times.
The standard cost data per canoe is shown below.
What is the expected change in before-tax profit for the proposed change in credit standard? The following information may be used in your analysis.
1. sales occur evenly throughout the year.
2. the firm is currently operating under-capacity.
3. Change in the inventory investment = ((change in annual sales*COGS%)/annual inventory turnover) * K
sales price 300.00 cost of goods sold: Material 100.00 labor 70.00 Overdead (20% is variable) 25.00 Selling expense (all variable) 15.00 Collection expense (50% variable) 10.00 Admin. expense (all fixed) 40.00 Bad debt 6.00 Profit per canoe 34.00Explanation / Answer
Expected change in the before tx profit for the proposed change in credit standard:
Particulars Current level Incremental sales Remarks sales price 300 345 115% of current level sales cost of goods sold: Material 100 115 115% of current level labor 70 80.5 115% of current level Overdead (20% is variable) 25 25.75 Variable component =25*20%=5. Multiply this with 115% and then add fixed component i.e., 20 Selling expense (all variable) 15 17.25 115% of current level Collection expense (50% variable) 10 10.75 Variable component =10*50%=5. Multiply this with 115% and then add fixed component i.e., 5 Admin. expense (all fixed) 40 40 Same amount as it is fixed Bad debt 6 13.8 % of bad debts to sales at current level =6/300 =0.04 this is doubled so, it is 0.04*2=0.08 expeceted bad debts =0.08*345 Total costs 266 303.05 Profit per canoe 34 41.95Related Questions
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