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.
-What is the net result of implementing the proposed plan? (See Table 15.5)
A) +$3,952
B) -$3,868
C) +$2,083
D) -$2,083

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 revenue: $345 canoes x $850 per canoe = $293,250Variable costs: $345 canoes x $650 per canoe = $224,250Fixed costs: $300 canoes x $700 per canoe = $210,000Total costs: $224,250 + $210,000 = $434,250Net income: $293,250 - $434,250 = -$141,000Increase in net income: -$141,000 - (-$145,000) = $3,952

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