A-1 Electrical has annual credit sales of $2.2 million. Current expenses for the collection department are $42,000,

Question:

A-1 Electrical has annual credit sales of $2.2 million. Current expenses for the collection department are $42,000, bad debt losses are 1.5%, and days' sales outstanding is 25 days. The firm is considering easing its collection efforts in such a way that collection expenses will be reduced to $32,000 per year. The change is expected to increase bad debt losses to 2.5% and to increase days' sales outstanding to 45 days. In addition, sales are expected to increase to $2.3 million per year.

Should the firm relax its collection efforts if the opportunity cost of funds is 14%, the variable cost ratio is 75%, and taxes are 30%?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...

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