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Credit Policy/Accounts Receivable Changes

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P13-7 Accounts receivable changes: without bad debts Tara's Textiles currently has credit sales of $360 million per year and an average collection period of 60 days.Assume that the price of Tara's products is $60 per unit and that the variable costs are $55 per unit. The firm is considering an accounts receivable change that will result in a 20% increase in sales and a 20% increase in the average collection period. No change in bad debts is expected. The firm's equal-risk opportunity cost on its investment in accounts receivable is 14%. (Note: Use a 365-day year.)

a. Calculate the additional profit contribution from new sales that the firm will realize if it makes the proposed change.
b. What marginal investment in accounts receivable will result?
c. Calculate the cost of the marginal investment in accounts receivable.
d. Should the firm implement the proposed change? What other information would be helpful in your analysis?

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The solution explains how to evaluate a change in credit policy.

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Please see the attached file

a. Calculate the additional profit contribution from new sales that the firm will
realize if it makes the proposed change.

Current units = $360,000,000  $60 = 6,000,000 units
Increase = 6,000,000 x 20% = 1,200,000 new units
Additional profit contribution = ($60 - $55) x 1,200,000 units
= $6,000,000

b. What marginal investment in accounts receivable will ...

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