Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60...

Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills $480,000 for sales and has $345,000 in variable costs. The change in credit terms is expected to increase sales to $540,000. Bad-debt expenses will increase from 1% to 1.5% of sales. The firm has a required rate of return on equal-risk investments of 20%. (Note: Assume a 365-day year.)

a. What additional profit contribution from sales will be realized from the proposed change?

b. What is the cost of the marginal investment in accounts

receivable?

c. What is the cost of the marginal bad

debts?

d. Do you recommend this change in credit terms?

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago

Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60...

Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bill $450,000 for sales and has $320,000 in variable costs. The change in credit terms is expected to increase sales to $540,000. Bad-debt expenses will increase from 1% to 1.5% of sales. The firm has a required rate of return on equal-risk investments of 20%. (Note: Assume a 365-day year.)...

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Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60...

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