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The Boyd Corporation has annual credit sales of $1.6 million. Current expenses for the collection department are $35,000, bad debt losses are 1.5 percent, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $22,000 per year. The change is expected to increase bad debt losses to 2.5 percent and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $1,625,000 per year. Boyd’s opportunity cost of funds is 16 percent, it has a variable cost ratio of 75 percent, and its tax rate is 40 percent.
7. Use the income statement approach to find the incremental bad debt losses
8. Use the income statement approach to find the incremental cost of carrying receivables
9. Use the income statement approach to find the incremental pre-tax profits from this proposal
10. Use the incremental analysis approach to find the incremental bad debt losses
11. Use the incremental analysis approach to find the incremental cost of carrying receivables
12. Use the incremental analysis approach to find the incremental pre-tax profits from this proposal
SolutionIncome Statement Approach7. Incremental bad debt losses.=1.5%*1,600,000=$24,000.8. Incremental cost of carrying receivables.= (1,600,000*16%)/365)*30=$21,041.9. Incremental pre-tax…
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