SOLUTION
A. Additional profit contribution =
.25 x $500,000 = $125,000
B. Cost of marginal investment in A/R =
.75 x $500,000 x .18 = $11,062.50
360/59
C. Cost of marginal bad debts =
.075 x $500,000 = $37,500
D. Net profit = $125,000 - ($11,062.50 + $37,500) = $76,437.50
Thus, Klimes should extend credit to this risk group.
- 1994, HarperCollins Publishers