Creole Industries, Inc., estimates that if it spent an additional $20,000 to hire another collection agent in its credit department, it could lower its bad-debt loss ratio to 3.5 percent from a current rate of 4 percent and also reduce its average collection period from 50 to 45 days.
(Assume that sales and inventory remain unchanged if the agent is hired.) Creole's annual credit sales are $5 million, and its variable cost ratio is 0.75. The firm's required pretax rate of return on receivables investment (i.e., the opportunity cost) is 18 percent. Determine the net effect on Creole's pretax profits of hiring the additional collection agent.