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Question

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Caruso Fabrics has

asked you to identify the impact of a change in credit policy on

the cost of bad debts. Under a proposed

plan allowing payment in 30 days, 40,000 units are sold at an

average price of $12. A more generous

offering will allow payment in 45 days and results in sales rising

to 50,000 units at the same price. Under

the current plan only 1.5 percent of sales end up being bad

debts. This number is expected to

increase to 2.75 percent under the new

policy. What is the marginal change in

the cost of bad debts?

Explanation / Answer

marginal change in cost of bad debts = (0.0275 * 12 * 50000) - (0.015 * 12 *40000)= 9300

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