Kitchen Enterprises is evaluating a proposal to lengthen its credit period from 30 to 45 days. All

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Kitchen Enterprises is evaluating a proposal to lengthen its credit period from 30 to 45 days. All customers will continue to pay on the net date. Currently, credit sales are $650,000, while variable costs are $455,000. The selling price is $20 per unit. The proposal is expected to lead to credit sales of $710,000. However, bad debts are expected to increase from 1% to 2% of sales. The required rate of return on equal-risk investments is 16.5%. Assume a 365-day year.
a. Calculate the additional profit contribution from sales if the proposal is implemented.
b. Calculate the cost of the marginal investment in accounts receivable.
c. Calculate the cost of the marginal bad debts.
d. Should the proposal be implemented? Explain.

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Related Book For  answer-question

Principles Of Managerial Finance

ISBN: 9781292018201

14th Global Edition

Authors: Lawrence J. Gitman, Chad J. Zutter

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