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    Auditing: Accounts receivable changes with bad debts

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    14.9 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 the 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.

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    Solution Preview


    Units sold= 50,000
    Selling price=$20
    Total revenue=50,000*$20=$1,000,000
    Variable cost=$15 per unit
    Units sold after increase in sales=60,000 units
    Total revenue after increase in sales=60,000*$20=$1,200,000
    Bad debt=2%
    Bad debt with increase in ...

    Solution Summary

    This solution shows the steps to determine the given accounting problems. Included is a calculation of the cost of the marginal bad debts to a firm and the amount of bad debt that the firms holds.