  A firm is contemplating stricter collection policies.  The following details are available:
i)  At present, the firm is selling 36,000 units on credit at a price of $ 32 each; the variable cost per unit is $ 25 per unit the average cost per unit is $ 29; average collection period is 58 days; and collection expenses amount to $ 10,000; uncollectible are 3 percent.    
ii) If the collections procedures are tighten, collection expenses will be increased to $30,000, uncollectible expenses will be decreased by 2 percent; the collection period will be 40 days; sales volume is likely to decline by 500 units.  Assume a 20% rate of return on investment, should the firm implement the new decision?


To determine whether the firm should implement the stricter collection policies, we need to compare the current and proposed situations in terms of the net benefit. Here's the step-by-step approach:

### 1. **Current Situation:**
- **Sales Revenue:**  
  $ 36,000 \times 32 = \$1,152,000 $
  
- **Variable Costs:**  
  $ 36,000 \times 25 = \$900,000 $
  
- **Contribution Margin:**  
  $ \$1,152,000 - \$900,000 = \$252,000 $
  
- **Uncollectibles:**  
  3% of sales revenue:  
  $ 0.03 \times \$1,152,000 = \$34,560 $
  
- **Collection Expenses:**  
  $ \$10,000 $

- **Investment in Receivables:**  
  The investment in receivables can be calculated as:  
  $ \text{Average Collection Period} \times \text{Sales per Day} \times \text{Variable Cost per Unit} $  
  $ = \frac{58}{365} \times \frac{1,152,000}{365} \times 25 = \frac{58}{365} \times 3,157.53 \times 25 \approx \$12,580 $
  
- **Cost of Investment:**  
  $ 20\% \times \$12,580 = \$2,516 $

- **Net Benefit:**  
  $ \text{Contribution Margin} - \text{Uncollectibles} - \text{Collection Expenses} - \text{Cost of Investment} $  
  $ = \$252,000 - \$34,560 - \$10,000 - \$2,516 \approx \$204,924 $

### 2. **Proposed Situation:**
- **Sales Volume:**  
  New sales volume: $ 36,000 - 500 = 35,500 $
  
- **Sales Revenue:**  
  $ 35,500 \times 32 = \$1,136,000 $
  
- **Variable Costs:**  
  $ 35,500 \times 25 = \$887,500 $
  
- **Contribution Margin:**  
  $ \$1,136,000 - \$887,500 = \$248,500 $
  
- **Uncollectibles:**  
  $ 1\% \times \$1,136,000 = \$11,360 $
  
- **Collection Expenses:**  
  $ \$30,000 $
  
- **Investment in Receivables:**  
  $ \frac{40}{365} \times \frac{1,136,000}{365} \times 25 = \frac{40}{365} \times 3,113.70 \times 25 \approx \$8,536 $
  
- **Cost of Investment:**  
  $ 20\% \times \$8,536 = \$1,707.20 $
  
- **Net Benefit:**  
  $ \$248,500 - \$11,360 - \$30,000 - \$1,707.20 \approx \$205,432.80 $

### 3. **Comparison and Conclusion:**
- **Current Net Benefit:** $ \$204,924 $
- **Proposed Net Benefit:** $ \$205,432.80 $

The proposed policy results in a slightly higher net benefit (\$508.80 more). Thus, **the firm should implement the new collection procedures**.

---

Would you like any more details, or do you have any other questions?

### Related Questions:
1. What is the break-even point in units if the price per unit is $32 and the average cost per unit is $29?
2. How would an increase in the variable cost per unit impact the contribution margin?
3. What would be the impact on the net benefit if the uncollectibles decreased by only 1% instead of 2%?
4. How does the average collection period affect the cost of investment in receivables?
5. What if the sales volume dropped by 1,000 units instead of 500 under the new policy?
6. How would a decrease in the price per unit affect the firm's decision regarding collection policies?
7. Can the firm use alternative collection methods to reduce expenses while maintaining a low uncollectible rate?
8. What would the impact be if the rate of return on investment changed from 20% to 25%?

### Tip:
Always consider the opportunity cost of capital when evaluating investment decisions involving changes in working capital policies.

Explore the financial analysis of implementing stricter collection policies in a firm. Analyze the impact on sales revenue, variable costs, contribution margin, uncollectibles, and collection expenses. Assess the net benefit calculation with a detailed step-by-step comparison between current and proposed policies.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation