Forrester fashion has annual credit sales of $270,000 units with an average coll

Question

Forrester fashion has annual credit sales of $270,000 units with an average collection period of 66 days. The company has a per-unit variable cost of $19 and a per-unit sale price of $28.50. Bad debts currently are 4.5% of sales. The firm estimates that a proposed relaxation of credit standards would not affect its 66-day average collection period but would increase bad debts to 6.75% of sales, which would increase to 324,000 units per year. Forrester requires a 15% return on investments.

What is the cost from the increased marginal investment in A/R?

Explanation / Answer

Statement showing maximum cost to be incurred

Particulars Current Proposed Incremental SPPU 28.5 28.5 VCPU 19 19 CPU 9.5 9.5 No of units 270000 324000 Total contribution 2565000 3078000 513000 Bad debt 346275 623295 277020 Incremental profit 235980 PVIF @15%, 1 year 0.8696 Pv 205200

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