10. Forrester Fashions has annual credit sales of 210,000 units with an average
ID: 2586256 • Letter: 1
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10. Forrester Fashions has annual credit sales of 210,000 units with an average collection period of 72 days. The company has a per-unit variable cost of $22 and a per-unit sale price of $33.00. Bad debts currently are 4.5% of sales. The firm estimates that a proposed relaxation of credit standards would not affect its 72-day average collection period but would increase bad debts to 6.75% of sales, which would increase to 252,000 units per year. Forrester requires a 10% return on investments. Show all necessary calculations required to evaluate Forrester's proposed relaxation of credit standards. (Note: Assume a 365-day year.) The additional profit contribution from an increase in sales is $ The cost from the increased marginal investment in A/R is $ The cost from the increase in bad debts is $ . (Round to the nearest dollar.) Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar. Enter a The net profit or loss from implementing the proposed plan is S negative number for a loss.) Is the proposed plan recommended? (1) (Select from the drop-down menu.) (1) Yes NoExplanation / Answer
Existing New Unit Sale 210000 252000 Sales Revenue (Unit Sale*33) 6930000 8316000 Less: Variable Cost (Unit Sale *22) 4620000 5544000 Contribution 2310000 2772000 Less: Bad Debt (4.5 and 6.75%) 311850 561330 Investment cost in AR (Sale*10%*72/365) 136701.4 164041.6438 Net Income 1861448.63 2046628.356 Working Final Answer 1. Additional Profit Contribution 2772000-2310000 462000 2. Cost from Marginal investment in AR 164041.6-136701.4 27340.2 3. Cost from increase in bad debt 561330-311850 249480 4. Net profit from implementation 2046628-1861448 185179.726 Proposed Plan is recommended for implementation as profit from it increasing by 185179
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