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 net result of implementing the proposed plan? (See Table 15.5)
A) $3,952
B) $3,869
C) $2,084
D) -$2,084

Question

Quizplus · Accepted Answer

The net result of implementing the proposed plan is an increase in net income of $3,952. This is calculated as follows:Sales increase: 15% x 300 canoes = 45 canoesNew sales: 300 canoes + 45 canoes = 345 canoesSales revenue: 345 canoes x $850 = $293,250Variable cost: 345 canoes x $650 = $224,250Contribution margin: $293,250 - $224,250 = $69,000Fixed cost: $700 x 300 canoes = $210,000EBIT: $69,000 - $210,000 = -$141,000Interest expense: $0 (assumed)Net income before bad debts: -$141,000Bad debts: 2% x $293,250 = $5,865Net income: -$141,000 - $5,865 = -$146,865Net income increase: -$146,865 - (-$150,817) = $3,952

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