Karen's Canoes

Assignment:

Determine the expected change in before$-$tax profit for the proposed change in credit standards.

Prepare the income statements in total, not per unit. The following information should be used in your

analysis.

Sales occur evenly throughout the year.

The firm is currently operating under$-$capacity.

Opportunity cost of Inventory Investment$=$

Change in Annual Sales x COGS $\%$ X r

Annual Inventory Turnover

Karen's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are

expected to increase $15\%$ from $300$ canoes per year to $345$ canoes per year. The average collection

period is expected to increase to $40$ days from $30$ days and bad debts are expected to double the

current level $($as a $\%$ of sales$).$ To support the higher sales level, an increase in the level of inventory will

be necessary. The firm's required return on investment is $6\%$ and their annual inventory turnover is $3$

times. Their COGS $\%$ is $58\mathrm{.}33\%.$

The current standard cost data is shown below.Karen's Canoes

Income Statement

INCOME STATEMENT

Sales

Variable Costs

Material

Labor

Overhead $($Variable Portion$)$

Selling Expense

Collection Exp $($Variable Portion$)$

Total Variable Costs

Total Fixed Costs

Profit before Credit Costs

Opportunity Cost of Investment in A$/$R

Opportunity Cost of Investment in Inv

Opportunity Cost of Bad Debts Expense

EBT

Opportunity Cost of Investment in A$/$R $=$

Old Policy

New Policy

Opportunity Cost of Investment in Inventory $=$

New Policy