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.
-What is the cost of marginal bad debts under the proposed plan? (See Figure 14.4)

Question

Quizplus · Accepted Answer

The cost of marginal bad debts is the increase in bad debts divided by the increase in sales. The increase in bad debts is 1% of $345,000 - 1% of $300,000 = $450. The increase in sales is 345 - 300 = 45 canoes. Therefore, the cost of marginal bad debts is $450 / 45 = $10 per canoe. The total cost of marginal bad debts is $10 * 345 = $3,450.

Caren's Canoes Is Considering Relaxing Its Credit Standards to Encourage