SHE CO. currently has annual sales of P2,000,000. Its average collection period is 40 days, and bad debts are 5 percent of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P250,000 annually. Variable costs are 60 percent of sales and the cost of carrying receivables is 12 percent. Assume a tax rate of 40 percent and 360 days per year. What would be the incremental investment in receivables if the change were made?

SHE CO. currently has annual sales of P2,000,000. Its average collection period is 40 days, and bad debts are 5 percent of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P250,000 annually. Variable costs are 60 percent of sales and the cost of carrying receivables is 12 percent. Assume a tax rate of 40 percent and 360 days per year. What would be the incremental investment in receivables if the change were made?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 14P

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