The Boyd Corporation has annual credit sales of $1.6 million. Current expenses f
ID: 2651936 • Letter: T
Question
The Boyd Corporation has annual credit sales of $1.6 million. Current expenses for the collection department are $38,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $22,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $1,675,000 per year. Assume a 365-day year.
Should the firm relax collection efforts if the opportunity cost of funds is 18%, the variable cost ratio is 60%, and taxes are 35%?
What is the effect of credit policy change? Do not round intermediate steps. Round your answer to the nearest dollar.
Net income changed by ?
Explanation / Answer
Net Income
Sales = 1600000
Less : Expenses = 38000
Less: Bad Debt = 24000
VC= 960000
Net Income = 578000
Less: Opp 1600000*18%*30/365 = 23671
Total 554329
Tax = 194015
Net Income 360314
Option II
Sales 1675000
Less: 22000
VC 1005000
Bad Debt 41875
Income 606125
Less Opp Cost
1675000*18%*45/365 37171
Total 568954
Tax 199134
Net Income 369820
Net Income is chnaged by 369820-360314 = $9506
As the net income is increased the firm should relax the collection efforts to 45 days
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