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The Dream Corp has annual credit sales of $5 million. Current expenses for the collection…

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The Dream Corp has annual credit sales of $5 million. Current expenses for the collection department are $60,000, bad- debt losses are 1.5%, and the days sales outstanding is 38 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $28,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days’ sales outstanding to 55 days. In addition, sales are expected to increase to $5.5 million per year. Should the firm relax collection efforts if the opportunity cost of funds is 12%, the variable cost ratio is 80%, and taxes are 25%? Current New Change 1. Relax Collection Efforts Credit Sales Current Expenses for Collection Bad debt Days Sales Outstanding Sales Variable costs Gross Profit New Collection costs New Bad debt New Days’ Sales Outstanding New Sales Receivables Carry Cost Collection Expenses Bad Debt Loss Profit before tak Taxes Cost of funds Variable cost ratio taxes Net income Should they relax collection effort? (Yes/No) 2. The Sleep Corp has annual credit sales of $5 million. Current expenses for the collection department are $10,000, bad- debt losses are 2.5%, and the days sales outstanding is 62 days. The firm is considering tightening its collection efforts such that collection expenses will be increased to $38,000 per year. The change is expected to decrease bad-debt losses to 1.5% and to decrease the days’ sales outstanding to 30 days. In addition, sales are expected to decrease to $4.8 million per year. should the firm tighten collection efforts if the opportunity cost of funds is 16%, the variable cost ratio is 75%, and taxes are 25%? 2. Tighten Collection Efforts Current New Change Credit Sales Current Expenses for Collection Bad debt Days Sales Outstanding Sales Variable costs Gross Profit New Collection costs New Bad debt New Days Sales Outstanding New Sales Receivables Carry Cost Collection Expenses Bad Debt loss Profit beforetak Taxes Net income Cost of funds Variable cost ratio taxes Should they tighten collection effort? [Yes/No)

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