FIN 419 week 4 problem - 14041

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FIN 419 - Week 4 Problems

P14-9

Accounts receivable changes with bad debts 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.

d) Considering all changes in costs and benefits, would you recommend the proposed
change? Explain.

e) Compare and discuss your answers in parts c and d.

P14-16

Zero-balance account Union Company is considering establishment of a zero-balance
account. The firm currently maintains an average balance of $420,000 in its disbursement
account. As compensation to the bank for maintaining the zero-balance account, the firm will
have to pay a monthly fee of $1,000 and maintain a $300,000 non–interest-earning deposit
in the bank. The firm currently has no other deposits in the bank. Evaluate the proposed
zero-balance account, and make a recommendation to the firm, assuming that it has a 12%
opportunity cost.

Solution Description

FIN 419 - Week 4 Problems

P14-9

Accounts receivable changes with bad debts 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 $

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