Question
Porras Pottery Products, Inc., spends $220,000 per annum on its collection department. The company has $ 12 Million in credit sales, its average collection period is 2.5 months and the percentage of bad-debt losses is 4%. The company believes that if it were to double its collection period, it could bring down the average collection period to 2 months and bad-debt losses to 3%. The added cost is $180,000, bringing total collection expenditures to $400,000 annually. Is the increased effort worthwhile if the before-tax opportunity cost of funds is 20%? If it is 10%?
Answer
