Question: A firm is evaluating an accounts change that would increase the bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the

A firm is evaluating an accounts change that would increase the 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 forecasted to increase to 60,000 units

a) What are bad debts in dollars currently and under the proposed change?

b) Calculate the cost of managerial bad debt to the firm.

c) Ignoring the additional profit contributions from increased sales, if the proposed change saves $3,500 and causes no change in 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 part c and d.

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