A firm is evaluating an accounts receivable
change that would increase bad debts from 2% to 4% of sales. Sales are currently
50,000 units, the selling price is $20 per unit, and the variable cost per unit is
$15. As a result of the proposed change, sales are forecast to increase to 60,000 units.
a. What are bad debts in dollars currently and under the proposed change?
b. Calculate the cost of the marginal bad debts to the firm.
c. Ignoring the additional profit contribution from increased sales, if the proposed
change saves $3,500 and causes no change in the average investment in accounts
receivable, would you recommend it? Explain.
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