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 investments in accounts receivable under the proposed plan?

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.

-What is the cost of marginal investments in accounts receivable under the proposed plan?

Quizplus · Accepted Answer

The cost of marginal investments in accounts receivable is calculated by determining the increase in accounts receivable due to the change in credit policy. The increase in sales is 45 canoes (345 - 300), and the average collection period increases by 10 days (40 - 30). The cost of marginal investment is calculated as: (45 canoes * $650 variable cost per canoe * 10/365) * 20% required return = $1,733.

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