The Arizona Corporation has annual credit sales of $3 million. Current expenses for the collection department are $60,000, bad debt losses are 3 percent, and the days sales outstanding is 40 days. Arizona is considering easing its collection efforts so that collection expenses will be reduced to $35,000 per year. The change is expected to increase bad debt losses to 5 percent and to increase the days sales outstanding to 55 days. In addition, sales are expected to increase to $3.5 million per year.
Should Arizona relax collection efforts, if the opportunity cost of funds is 12 percent, the variable cost ratio is 75 percent, and its marginal tax rate is 40 percent? All costs associated with production and credit sales are paid on the day of the sale.