A company is considering shortening its credit period from 30 days to 20 days an

Question

A company is considering shortening its credit period from 30 days to 20 days and believes as a result of its change, its average collection period will decrease from 36 days to 30 days. Bad debt expenses are also expected to decrease from 1.2 percent to .8 percent of sales. the firm is currently selling 300,000 units but believes as a result of the change that sales will decline to 275,000 units. On 300,000 units the sales revenue is $4,200,000, variable costs total $3,300,000 and fixed costs are 300,000. The firm has a required return on similar risk investments of 15%. what is the reduction in profit contribution from decline in sales under the proposed plan?

Explanation / Answer

Particulars Present Proposed Sales In Units 300000 275000 Sale Price 14 14 Sales Total 4200000 3850000 Average Collection Period 36 30 Debtors (Sales/365*ACP)          414,246.58           316,438.36 Bad Debts 1.2% 0.8% Bad Debts               4,970.96                2,531.51 Sales 4200000 3850000 Less: Variable Cost 3300000 3025000 Less: Fixed Costs 300000 300000 Profit 600000 525000 Change In Profit -75000 Add: Savings In Bad Debts                2,439.45 Net Loss from proposed plan           (72,560.55)

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