FIN 419 Week 4 Individual Assignment - Assignments from the Readings

Apr 24th, 2015
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FIN 419 Week 4 Individual Assignment - Assignments from the Readings

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Week 4 - Assignments from the ReadingsWeek 4 - Assignments from the ReadingsChapter 14: Problem 14.9Evaluate 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 SalesSales 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 ReceivableTo determine the cost of the marginal investment in accounts receivable, Lewis Enterprises must find the difference between the cost of carrying receivables under the two credit standards.Average investment under proposed plan =11,000 units * $31= $ 56,055 36560Average investment under present plan =10,000 units * $31= $ 38,219 36545Marginal investment in accounts receivable =($56,055 - $38,219) = $ 17,836 Required return on investment (25%) =0.25Cost of marginal investment in accounts receivable =(4,459)The resultin

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