Anarchy Corp. is evaluating a possible change to their AR policy. Currently, they have $200,000 in sales on which they earn a profit margin of 10%. Their average collection period is currently 40 days, and they would like to improve it to 20 days. They are considering the use of UK Bank who has guaranteed they could achieve that improved collection period. UK Bank charges a fee of $15,000 annually. Anarchy estimates it could earn a return of 7% on any freed up cash. Anarchy estimates that sales would drop by 10% if they use UK Bank.

a) Calculate the amount of AR under the current situation, and if they were able to improve their cash collections. (3 marks)

b) Calculate the dollar amount of return that could be earned on any freed up cash. (2 marks)

c) Calculate the impact of the decrease in sales on Anarchys profit. (2 marks).

d) Calculate the net cost / benefit of using UK Bank to improve collections. Conclude on whether Anarchy should move ahead with the plan. (4 marks)