Mikes widgets inc is considering relaxing its credit, Ask an Expert

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Mike's Widgets, Inc. is considering relaxing its credit standards in order to meet a competitor’s change in credit policy. As a result of the change, next year’s sales are expected to increase 15% from 5,000 widgets to 5,750 widgets, the average collection period is expected to increase from 45 days to 60 days and bad debt expense is expected to increase from 2% of sales to 2.5% of sales. The average sales price per unit is $1,000 and the variable cost per unit is $850. The firm’s required return on investment is 10%. Use 365 days / year.

What is the cost of bad debts under the present and proposed plans? What is the marginal cost of those debts?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92368401

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