Question

Alexis Enterprises, an importer and exporter of precious metals and jewelry from around the world, sells its objets d'art to stores in six northeastern states and generates annual sales of $9,000,000. In response to increasing concerns regarding the firm's slow collections and elevated bad-debt ratios, Alexis's treasurer has suggested that the firm change its current collection policy. Specifically, he proposes that the firm progress beyond its current collection efforts (sending late-payment notices and making follow-up telephone calls) and hire an outside professional collection agency. It is expected that the collection agency will cost $45,000 and that the firm's sales and inventory requirements will be unaffected by the policy change. To facilitate the evaluation of this proposal, the treasurer has had his assistant, Mia, collect the following information and has asked you to determine whether or not Alexis should revise its collection policy: Current Credit Data Days sales outstanding (DSO)- 95 days Bad-debt losses = 10% of sales Contribution margin = 25% Return earned on any freed funds = 149 Forecasted Data for Revised Collection Policy Days sales outstanding (DSO)- 70 days Bad-debt losses = 5% of sales Given this data and assuming that the revised collection policy is implemented, complete the following statements: A. Alexis's accounts receivable investment is expected to change by: B. The marginal income earned on any freed funds is expected to be: C. The change in the firm's bad-debt losses is forecast to be: D. The expected net benefit associated with the revised policy is: $491,301 Based on these findings, should Alexis make the proposed change? WH 308.470 $687,821 Yes, because the net benefit of the proposal is negative. Yes, because the net benefit of the proposal is equal to or greater than $0. No, because the net benefit of the proposal is equal to or greater than $0. O No, because the net benefit of the proposal is negative.

Answer 1

1.

a. Current accounts receivable = 9,000,000 *95/ 365 = 2,342,465.75

Proposed accounts receivable = 9,000,000 *70/ 365 = 1,726,027.40

Accounts receivable is expected to change by = 2,342,465.75 - 1,726,027.40 = 616,438

b. Marginal income earned on freed funds = 616,438 * 14% = 86301

c. Change in bad debts = 9,000,000 *(10% -5%) = 450,000

d. Net benefit = 86301 + 450,000 - 45000 = 491,301

2. Yes, because the net benefit of the proposal is equal to or greater than $0

3. (1) Setting a lax collection policy will result in added costs and often will not increase the speed at which the collections are received nor reduce the firm's losses due to uncollectible accounts

(2) Setting an overly aggressive collection policy run the risk of alienating the good customers who may customers who may be going through relatively minor and brief cash flow difficulties.