P14-8 Accounts receivable changes with bad debts A firm is evaluating an accounts
receivable change that would increase bad debts from 2% to 4% of sales. Sales
are currently 50,000 units, the selling price is $20 per unit, and the variable cost
per unit is $15. As a result of the proposed change, sales are forecast to increase
to 60,000 units.
a. What are bad debts in dollars currently and under the proposed change?
b. Calculate the cost of the marginal bad debts to the firm.
c. Ignoring the additional profit contribution from increased sales, if the proposed
change saves $3,500 and causes no change in the average investment
in accounts receivable, would you recommend it? Explain.
d. Considering all changes in costs and benefits, would you recommend the
proposed change? Explain.
e. Compare and discuss your answers in parts c and d.
The solution explains the calculation of bad debts and whether to accept a plan which changes sales and bad debts.