Question

Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent. (Assume a 360-day year) What is the cost of marginal investments in accounts receivable under the proposed plan?

Answer 1

Answer:

$ 1733

Explanation:

Cost Marginal Investment in Accounts Receivable = Marginal Investment in Accounts Receivable * firm's required return on investment

Marginal Investment in Accounts Receivable = Average Investments Under proposed Plan - Average Investments Under present Plans

Average Investments in Accounts Receivable = Total variable cost of annual sales / Turn over of account receivables

Turn Over of account receivables = 360/ average collection period.

Using above formula for calculation , Answer = $ 8665 * 20% = $ 1733