Table 15.5
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. (Assume a 360-day year)
-What is the firm's additional profit contribution from sales under the proposed relaxation of credit standards? (See Table 15.5)
A) $2,250
B) $6,750
C) $9,000
D) $69,000

Question

Quizplus · Accepted Answer

The additional profit contribution from sales can be calculated as the increase in sales multiplied by the contribution margin per unit. The increase in sales is 45 canoes (345 - 300), and the contribution margin per unit is the price per canoe minus the variable cost per canoe, which is $850 - $650 = $200. Therefore, the additional profit contribution is 45 canoes * $200 = $9,000.

Table 15.5 Caren's Canoes Is Considering Relaxing Its Credit Standards to Encourage