Calculate additional profit contribution from sales expected

Assignment Help Financial Management

Reference no: EM131554639

Papa Doc’s Pig Products sells its hams for $20 each. All sales are on credit and last year amounted to 75,000 hams. The variable cost per ham is $12. The firm’s total fixed costs are $300,000.

Papa Doc’s is currently contemplating a relaxation of credit standards that is expected to result in a 4 percent increase in ham sales to 78,000 hams, an increase in the average collection period from its current level of 30 days to 45 days and an increase in bad debt expenses from the current level of 1 percent of sales to 2 percent.

The firm’s required return on equal risk investments, which is the opportunity cost of tying up funds in accounts receivable, is 15 percent.

a. Calculate the additional profit contribution from sales expected to result from this relaxation of credit standards.

b. Calculate the marginal investment in accounts receivable and the additional marginal cost of accounts receivable.

c. Calculate the cost of marginal bad debts.

d. Calculate the net profit or net loss that would result from the decision to relax credit standards.

e. Should the credit standards be relaxed? Why or why not?

Reference no: EM131554639

Questions Cloud

What is the cost of existing common stock : If dividends are expected to grow at 3.3 percent a year, what is the cost of existing common stock?

Consider the balance sheet of casino banking : Consider the balance sheet of Casino Banking Inc. (CBI): What is the problem in 4a called? How will this problem be resolved?

What is the after-tax cost of existing debt : What is the yield to maturity? what is the after-tax cost of existing debt?

Private mortgage insurance and fha mortgage insurance : Which of the following represent key differences between private mortgage insurance and FHA mortgage insurance?

Calculate additional profit contribution from sales expected : Calculate the additional profit contribution from sales expected to result from this relaxation of credit standards.

What’s the schedule variance for the project : What is the actual cost (AC) for the project? What’s the schedule variance (SV) for the project?

Conroversial or debate about child vaccination : Inquiry based resarch about child vaccination - hypohesis about cuases and effects of some conroversial or debate about child vaccination.

Current research project : Post a directly quoted paragraph from one source that is appropriate for your current research project. Then offer a paraphrase or summary of the same paragraph

Paper on organizational structure : You have your thoughts down on paper and have gone over your organizational structure to be sure that your argument is presented in the clearest possible way

User Account

All Pages