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Farm Trucks Limited (FTL) expects to have sales this year of $30 million under its current...

Farm Trucks Limited (FTL) expects to have sales this year of $30 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 55 days; and the bad debt loss percentage is 4 percent. Since FTL wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 12 days. This change would reduce expected sales by $1,500,000, but it would also shorten the DSO on the remaining sales to 40 days. Expected bad debt losses on the remaining sales would fall to 2.5 percent. The variable cost percentage is 60 percent, and the cost of capital is 11 percent.

8. Use the income statement approach to find the incremental bad debt losses

9. Use the income statement approach to find the incremental cost of carrying receivables

10. Use the income statement approach to find the incremental pre-tax profits from this proposal

11. Use the incremental analysis approach to find the incremental bad debt losses

12. Use the incremental analysis approach to find the incremental cost of carrying receivables

13. Use the incremental analysis approach to find the incremental pre-tax profits from this proposal

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Answer #1

8. The debt loss in previous year was 1.2 million ( 30*.04)

the new debt loss will be 0.7125 (30-1.5*2.5%)

incremental bad loss is 0.4875 ( 1.2-0.7125)

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