Accounts receivable changes without bad debts Tara\'s Textiles currently has cre
ID: 2788943 • Letter: A
Question
Accounts receivable changes without bad debts Tara's Textiles currently has credit sales of $362 million per year and an average collection period of 65 days. Assume that the price of Tara's products is $ 61 per unit and that the variable costs are $ 55 per unit. The firm is considering an accounts receivable change that will result in a 20.2 % increase in sales and a 19.8 % increase in the average collection period. No change in bad debts is expected. The firm's equal-risk opportunity cost on its investment in accounts receivable is 14.6 % (Note: Use a 365-day year.)
a.Calculate the additional profit contribution from new sales that the firm will realize if it makes the proposed change.
b.What marginal investment in accounts receivable will result?
c.Calculate the cost of the marginal investment in accounts receivable.
d.Should the firm implement the proposed change? What other information would be helpful in your analysis?
Round all answers to the nearest dollar.
Explanation / Answer
a)
current units = 362000000/61 = 5934426 units
increase in units = 5934426 * 20.2% =1198754 units
additional profit contribution = 1198754 * (61-55)
= 7192524
b)
average investment in account receivable = total variable cost /turnover of A?R
turnover present plan= 365/65 = 5.615
turnover proposed plan = 365/65*1.198 = 4.687
average investment proposed plan = (5934426+7192524 *55)/4.687 = 154039310.9
average investment present plan = 5934426*55/5.615 = 58128838.82
margin investment in A/R = 95910472.08
c)
cost of marginal investmentin account receivable = marginal investment * cost of margin investment
= 95910472.08 * 14.6%
= 14002928.92
d)
the additional profitbility of 7192524 is less than additional costs, hence No