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

question 21

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 cost of marginal bad debts under the proposed plan? (See Table 15.5)

• A) $383
• B) $765
• C) $3,315
• D) $5,100

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Definitions:

Domestic Support Obligations

Financial responsibilities, such as alimony or child support, owed by one individual to another as ordered by a court.

Unsecured Note

A financial instrument that represents a loan not backed by collateral, typically entailing higher risk for the lender.

Entitled to Priority

Entitled to priority refers to a situation where certain claims, such as debts or interests, are given precedence over others in the event of a bankruptcy or liquidation.

Secured Creditors

Creditors who have a legal claim or lien on specific assets of the debtor as collateral for the debt.