August 2003 QUESTION 3 a to B 1. Marginal profit from add itional sales (10000×04) 5000 (2000×0.4) 2. Beginning level of receivables 0000 31250 42500 (Sales/360/ACP) (2400006030)(2500006045)(255000(36060) level of receivables 42500 (New sales/360/New A.C. P) 25000036045)(25500036060)(25700036075) 4. Add itional receivables 11250 11250 11042 31250-20000 42500-31250)(53542-42500 5. Add itional investment in receivables 6750 6750 6625 4. x variable cost %) (11250×0.6 (11042×06) 6. Required return on additional investment 1350 1325 (5. x required rate of return (6750×0.2 (6750×0.2) (6625×0.2) 7. Net position +2650 +650 (4000-1350) (2000-1350) (800-1325) Conclusion: It is worthwhile extending the average collection period by 30 days to 60 days( Plan B)but not beyond that pointAugust 2003 QUESTION 3 (a) To A A to B B to C 1. Marginal profit from additional sales (New sales x profit margin) 4 000 (10 000 ×0.4) 2 000 (5 000 ×0.4) 800 (2 000 ×0.4) 2. Beginning level of receivables (Sales/(360/A.C.P.)) 20 000 (240 000/(360/30)) 31 250 (250 000/(360/45)) 42 500 (255 000/(360/60)) 3. New average level of receivables (New sales/(360/New A.C.P.)) 31 250 (250 000/(360/45)) 42 500 (255 000/(360/60)) 53 542 (257 000/(360/75)) 4. Additional receivables (3. - 2.) 11 250 (31 250 - 20 000) 11 250 (42 500 - 31 250) 11 042 (53 542 - 42 500) 5. Additional investment in receivables (4. x variable cost %) 6 750 (11 250 ×0.6) 6 750 (11 250 ×0.6) 6 625 (11 042 ×0.6) 6. Required return on additional investment (5. x required rate of return) 1 350 (6 750 ×0.2) 1 350 (6 750 ×0.2) 1 325 (6 625 ×0.2) 7. Net position (1. - 6.) +2 650 (4 000 - 1 350) +650 (2 000 - 1 350) -525 (800 - 1 325) Conclusion: It is worthwhile extending the average collection period by 30 days to 60 days (Plan B) but not beyond that point