Week 4 - Assignments from the Readings

Chapter 14: Problem 14.9

Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.)

To determine whether to relax its credit standards, Lewis Enterprises must calculate its effect on the firm’s additional profit contribution from sales, the cost of the marginal investment in accounts receivable, and the cost of marginal bad debts.

Additional Profit Contribution from Sales

Sales are expected to increase by 10%, or 1,000 units. The profit contribution per unit will equal the difference between the sale price per unit ($40) and the variable cost per unit ($31). The profit contribution per unit therefore will be $9. The total additional profit contribution from sales will be $9,000 (1,000 units x $9 per unit).

Cost of the Marginal Investment in Accounts Receivable

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