Solved – The Pettit Corporation has annual credit sales of $2 Million. Current expenses for the collection department are $30,000, bad debt losses

Question

The Pettit Corporation has annual credit sales of $2 Million. Current expenses for the collection department are $30,000, bad debt losses are 2% and its days sales outstanding is 30 days. Pettit is considering easing its collection efforts so that collection expenses will be reduced to $22,000 per year. The change is expected to increase bad debts losses to 3% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $2.2 Million per year.
Should Pettit relax collection efforts if the opportunity cost of funds (OC) is 12%, the variable cost ratio (VCR) is 75% and its marginal tax rate is 40% ?

Answer

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