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 informat 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 -14% 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 statement 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? WH9300170 $687,821 No, because the net benefit of the proposal is equal to or greater than $0. Yes, because the net benefit of the proposal is equal to or greater than $0. No, because the net benefit of the proposal is negative. Yes, because the net benefit of the proposal is negative.

Answer 1

Given,

Sales = $90,00,000

As per existing policy,account receivable outstanding 95 days

Therefore investment in account receivable is $90,00,000 $\times$ 95/365 = $23,42,465

As per revised policy,account receivable will be outstanding for 70 days

Therefore investment in account receivable is $90,00,000 $\times$ 70/365 = $17,26,027

Change in account receivable investment is $6,16,438.

Variable portion on investment reduced in account receivable = $6,16,438 $\times$ 75/100 = $4,62,328

Margin earned on freed funds = $4,62,328 $\times$ 14/100 = $64,726

Existing bad debts = $90,00,000 $\times$ 10/100 = $9,00,000.

Revised bad debts = $90,00,000 $\times$ 5/100 = $4,50,000.

Change in bad debts = $4,50,000.

Contribution margin on account receivable = $6,16,438 $\times$ 25/100 = $1,54,110

Cost of collection agency =$ 45,000

Net Benefit received = $154110 + $450000 - $45,000 = $5,59,110

Alex should make the proposed change because Net benefit of the policy change is greater than zero.