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Tamara Bookstore currently has credit sales of 2.5 million per year and an average collection period of 40 days. Assume that the price of Tamara's product is 80 per unit and that the variable costs are 45 per unit. The firm is considering an accounts receivable change that will result in a 25% inrease in sales and a 10% increase in the average collection period. No change in bad debts is expected. The firm's opportunity cost on its investment in accounts receivable is 14%. ( Note: Use a 365-day per year.)
Requirements:
Problem a. Calculate the additional profit contribution from sales that the firm will realize if it makes the proposed change.
Problem b. What marginal investment in accounts receivable will result?
Problem c. Calculate the cost of the marginal investment in accounts receivable.
Problem d. Should the firm implement the proposed change? what other information would be helpful in your analysis?
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