Cleaning Maids Inc. is considering shortening its credit period from 30 days to 20 days and believes, as a result of this change, its average collection period will decrease from 36 days to 30 days. Bad debt expenses are also expected to decrease from 1.2% to 0.8% of sales. The firm is currently selling 300,000 units but believes as a result of the change, sales will decline to 275,000 units. On 300,000 units, sales revenue is $4,200,000, variable costs total $3,300,000 and fixed costs are $300,000. The firm has a required return on similar-risk investments of 15%
Evaluate the proposed change and make a recommendation to the firm.
It is vital that your answer needs to include:
1) What is the additional profit contribution from sales[?units x ($?-$?)]
2) Average investment under proposed plan ($? x ?/?)
3) Average investment under present plan ($? x ?/?)
4) Cost of marginal investment in A/R (? x $?)
5) Bad debts under proposed plan (? x $? x ?)
6) Bad debts under present plan (? x $? x ?)
7) Net profit from implementation of proposed plan
Please follow these guidelines and show work.
The effects of a relaxation of credit standards are determined.