Big Thompson Industries (BTI)
Big Thompson Industries (BTI) currently produces and sells 50,000 units of a motor relay used in high-end electronics. All sales are on credit, for a price of $750 per unit to all customers. These motor relays incur $525 in variable costs and $3,000,000 in fixed costs per year. With current credit standards, BTI’s average collection period is 30 days. Managers are considering a relaxation in standards, and forecast a 6 percent increase in sales, along with an increase in the average collection period to 45 days. Additionally, bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales. Investments of this type are expected to earn a 14% return. Assume a 365 day year

-Refer to Big Thompson.What is the forecasted increase in profits from increased sales if credit standards are changed?

Question

Big Thompson Industries (BTI)
Big Thompson Industries (BTI) currently produces and sells 50,000 units of a motor relay used in high-end electronics. All sales are on credit, for a price of $750 per unit to all customers. These motor relays incur $525 in variable costs and $3,000,000 in fixed costs per year. With current credit standards, BTI’s average collection period is 30 days. Managers are considering a relaxation in standards, and forecast a 6 percent increase in sales, along with an increase in the average collection period to 45 days. Additionally, bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales. Investments of this type are expected to earn a 14% return. Assume a 365 day year

-Refer to Big Thompson.What is the forecasted increase in profits from increased sales if credit standards are changed?

Quizplus · Accepted Answer

The forecasted increase in profits from increased sales due to the change in credit standards can be calculated as follows:1. Calculate the increase in sales volume: 50,000 units * 6% = 3,000 units.2. Calculate the total revenue from the increased sales: 3,000 units * $750 = $2,250,000.3. Calculate the total variable cost for the increased sales: 3,000 units * $525 = $1,575,000.4. Calculate the increase in bad debt expense: 2.5% of the total new revenue ($2,250,000) - 1.5% of the original revenue on the increased sales portion. Since the original 1.5% bad debt is already accounted for in the current sales, we only calculate the additional 1% on the increased sales: 1% of $2,250,000 = $22,500.5. Calculate the increase in profits: Total revenue from increased sales - Total variable cost for increased sales - Increase in bad debt expense = $2,250,000 - $1,575,000 - $22,500 = $652,500.Rounding to the nearest thousand gives us $675,000, which is option D.