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 cost of marginal bad debts under the proposed plan? (See Table 15.5)
A) $383
B) $765
C) $3,315
D) $5,100

Question

Quizplus · Accepted Answer

To find the cost of marginal bad debts, we need to calculate the increase in bad debt expense under the proposed plan. Currently, the bad debt rate is 1% of sales, so at the current level of 300 canoes, the bad debt expense is:

300 x $850 x 0.01 = $2550

Under the proposed plan, sales will increase to 345 canoes, and bad debts are expected to double to 2% of sales. Therefore, the bad debt expense will be:

345 x $850 x 0.02 = $5865

The increase in bad debt expense is:

$5865 - $2550 = $3315

Therefore, the cost of marginal bad debts under the proposed plan is $3,315.

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