Table 15.5 Caren's Canoes Is Considering Relaxing Its Credit Standards to Encourage

question 335

Multiple Choice

Table 15.5
Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent. (Assume a 360-day year)
-What is the firm's additional profit contribution from sales under the proposed relaxation of credit standards? (See Table 15.5)

• A) $2,250
• B) $6,750
• C) $9,000
• D) $69,000

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Definitions:

Common

Pertains to something that is usual, shared by multiple entities, or occurring frequently.

Positive Externality

A benefit that affects someone who did not choose to incur that benefit, often related to economic activities.

Nominal

pertaining to names or terms, or representing values by names in certain contexts, such as nominal data in statistics which categorizes without a natural order.

Augmented

Enhanced or improved by adding features, components, or elements not originally present.