Competitive Mesh Shirts is considering a plan to ease its credit terms in order to generate greater revenues. Last year, Competitive had sales of 1,000,000 units at a price and variable cost of $20 and $15, respectively. Its current average collection period is 20 days and its percentage of bad debt expense is 2% while it required return on investment is 10%. If Competitive were to ease its credit terms, the firm anticipates that its sales would increase to 1,200,000 units without a change in price or variable costs. However, the average collection period is expected to increase to 30 days and bad debt expense is expected to increase to 3%.
-What is Competitive's net profit for the credit decision at hand?

Question

Quizplus · Accepted Answer

Current Level of AR investment: (1,000,000 ´ 15)/(365/20)= 821,917.81
Future Level of AR investment: (1,200,000 ´ 15)/ (365 /30)= 1,479,452.84
Cost of investment (1,479,452.84 - 821,917.81)´ .1= 65,753.50
Bad Debt Expense: (1,200,000 ´ 20 ´ .03)- (1,000,000 ´ 20 ´ .02)= 320,000
Marginal profit from increased sales: 200,000 ´ 5 = 1,000,000
Net Profit: 1,000,000 - 65,753.50 - 320,000 = 614,246.50

Competitive Mesh Shirts Is Considering a Plan to Ease Its