[ivory5130]

I have to calculate the additional profit contribution fro new sales that the firm will realize if it makes the proposed change.

The company currently has credit sales of 360 million per year and an avg. collection period of 60 days. Assume that the price of the products is 60 per unit and that the variable costs are 55 per unit. The firm is considering an a/r change that will result in a 20% increase in sales and a 20% increase in the avg. collection period. No change in bad debts is expected. The firm's equal-risk opportunity cost on its investment in a/r is 14%.

I came up with:

$60 per unit - $55 per unit= $5

$5 per unit x ? Units= ? Additional profit.

The example in the book gave me the units of the year. How am I suppose to figure this out?:confused:

[asastring]

company produces 6,000,000 per year. VC are $330,000,000. 20% increase in units is 1,200,000 units. Collection is $1,000,000 per day (360,000,000 divided by 360 days) we will lose $9,000,000 in collection for the year. (20% increase is 9 days)

New sales 7,200,000units, new revenue $432,000,000 - $9,000,000 or $423,000,000.

cost on investment is 66,000,000 (1,200,000 x $55) X 14% or $9,240,000

Variable cost 396,000,000 + 9,240,000 "risk"

Not familiar with "equal-risk opportunity cost" but it's a cost so.

sales $423,000,000 - cost (variable 396 + 9.240) equals$405,240,000

profit should be $17,760,000

If we assume that the original profit was $5 per unit or $30,000,000 one might assume that that the new idea is not as profitable.

If not, you at least have some additional info to consider. Good luck