Question

Accounts receivable changes with bad debts A firm is evaluating an accounts receivable change that would increase bad debts from​ 2% to 44​% of sales. Sales are currently 50 comma 00050,000 ​units, the selling price is​ $20 per​ unit, and the variable cost per unit is​ $15. As a result of the proposed​ change, sales are forecast to increase to 80 comma 00080,000 units. a. What are bad debts in dollars currently and under the proposed​ change? b. Calculate the cost of the marginal bad debts to the firm. c. Ignoring the additional profit contribution from increased​ sales, if the proposed change saves​ $3,500 and causes no change in the average investment in accounts​ receivable, would you recommend​ it? d. Considering all changes in costs and​ benefits, would you recommend the proposed​ change? e. Compare and discuss your answers in parts c and d. a. The​ firm's current amount of bad debts in dollars is ​$nothing. ​(Round to the nearest​ dollar.)

Answer 1

a) curently $ 20,000

proposed scenario $ 64,000

b) differential $ 44,000

c) and d)

differential contribution:

30,000 units x ($20 - 15) = 150,000

then, we subtract the 44,000 bad debt and add the 3,500 cost savings.

150,000 3,500 cost savings - 44,000 bad debt = 114,500

It would be recomented As with the contribution from sales will increase by 114,500

Explanation:

expected sales 80,000 units at $20 each

bad debt will be 4% os sales:

80,000 x $20 x 4% = $64,000

before, the bad debt were:

50,000 units at $20 with 2% bad dbet

50,000 x $20 x 0.02 = $20,000