Reference no: EM133061180

Question - Blue Valley Incorporated is considering shortening its credit period from 30 days to 20 days and believes, as a result of this change, its average collection period will decrease from 36 days to 30 days. Bad debt expenses are also expected to decrease from 1.2 percent to 0.8 percent of sales. The firm is currently selling 300,000 units but believes as a result of the change, sales will decline to 275,000 units. On 300,000 units, sales revenue is R4,200,000, variable costs total R3,300,000, and fixed costs are R300,000. The firm's required rate of return on equal-risk investments is similar to the rate at which the firm sources for financing. Two alternative financing sources are usually available: Tiger Bank Limited usually offers the firm a R500 000 annual loan at 13% discount interest, with a compensating balance of 10%, while Lion Bank limited usually offers the same annual amount at 14% simple interest with interest payable monthly. Blue Valley Incorporated prefers to take the cheaper option and the firm assumes a 360- day per year cycle.

REQUIRED -

1. Determine the firm's acceptable rate of return on equal-risk investments.

2. Calculate the reduction in the profit contribution resulting from the decline in sales.

3. Determine the cost of marginal investment in accounts receivable resulting from this change.

4. Calculate the reduction in marginal bad debts resulting from this change.