Question

The Boyd Corporation has annual credit sales of $2.57 million. Current expenses for the collection department are $44,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $26,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $2,595,000 per year. Suppose that the opportunity cost of funds is 19%, the variable cost ratio is 71%, and taxes are 40%. Assuming a 365-day year, calculate the cost of carrying receivables under the current policy and the new policy. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.

Current policy: $  

New policy: $  

Answer 1

	Current policy	New policy	% change
Annual credit sales	2,570,000	2,595,000	0.97%
Collection expense	44,000	26,000	-40.91%
bad debt losses	1.50%	2.50%
bad debt losses	38,550	64,875	68.29%
days sales outstanding	30	45	50.00%
opportunity cost of funds	19%	19%
opportunity cost of days sales outstanding	40,134	60,787	51.46%
variable cost rate	71%	71%
variable cost	1,824,700	1,842,450	0.97%
net contribution before tax	622,616	600,888	-3.49%
tax rate	40%	40%
tax liability	249,046	240,355	-3.49%
net cost of carrying receivable after tax	373,569	360,533	-3.49%

It can be seen that the company is making lower income under the new policy. This is because- as the new policy increases credit sales, the opportunity cost and credit losses also increase.