The Boyd Corporation has annual credit sales of $1.73 million. Current expenses for the collection department...

The Boyd Corporation has annual credit sales of $1.73 million. Current expenses for the collection department are $43,000, bad-debt losses are 1.8%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $27,000 per year. The change is expected to increase bad-debt losses to 2.8% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $1,755,000 per year. Suppose that the opportunity cost of funds is 16%, the variable cost ratio is 63%, 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: $

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Expert Solution

Based upon the given information provided in question

Formulae for calculating Cost of carrying receivables

Cost of carrying receivables = Days of sales outstanding (DSO) * Sales per day * Variable Cost ratio * Cost of Funds

The following would the calculation

Particulars	Current Policy	New Policy
Days of sales outstanding (DSO) (a)	30 Days	45 Days
Sales per day = Total Sales/ 365 (b)	$ 4,739.73	$ 4,808.22
Variable cost ratio (c)	63%	63%
Cost of funds (d)	16%	16%

Cost of carrying receivables (e) = (a) * (b) * (c) * (d)	$ 14,333	$21,810

Calculation of profitability in both the policies:

Particulars	Current Policy	New Policy
Sales (a)	$ 1,730,000	$ 1,755,000
Less: Variable Cost *(b) = 63% (a)**	$ 1,089,900	$ 1,105,650
Profit before credit cost and taxes (c ) = (a) - (b)	$ 640,100	$ 649,350
Less: Collection Expenses (d)	$ 43,000	$ 27,000
Less: Bad Debts (e) current policy *(e) = 1.80% (a) new policy (e) = 2.8% * (a)**	$ 31,140	$ 49,140
Less: Cost of carrying receivables (f)	$ 14,333	$ 21,810
Income Before Tax (g) = (c ) - (d) - (e ) - (f)	$ 551,627	$ 551,400
Less: Taxes @ 40% (h) = 40% of (g)	$ 220,651	$ 220,560
Income After Tax (i) = (g) - (h)	$ 330,976	$ 330,840

Trust the same will serve your purpose.

Should you need any clarifications, please feel free to comment.

jeff jeffy answered 10 months ago

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