P15-12-Shortening the credit period- A firm is contemplating shorting its credit

Question

P15-12-Shortening the credit period- A firm is contemplating shorting its credit period from40 to 30 days and believers that, as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt expenses are expected to decrease from 1.5% to 1% of sales. The firm is currently selling 12,000 units but believers that the sales will decline to 10,000 units as a result of the proposed changes. The sales price per unit is $56, and the variable cost per unit is $45. The firm has a required return on equal-risk investments of 25%. Evaluate this decision and make a recommendation of the firm. (Note; assume a 365-day year.)

Explanation / Answer

Reduction in profit contribution from sales = 2,000 units

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