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
-What will be BTI's average investment in accounts receivable under the new standards?

Question

Quizplus · Accepted Answer

To calculate the average investment in accounts receivable, we need to first calculate the new credit sales and the new average accounts receivable balance.

New credit sales = 50,000 units * $750 * 1.06 = $39,900,000

New average accounts receivable balance = (old balance * old collection period + new credit sales * new collection period) / 365

= (($750 * 50,000 * 30) / 365) + (($39,900,000 / 365) * 45)

= $3,430,479

Therefore, the correct answer is A) $3,430,479.