The Boyd Corporation has annual credit sales of $1.6 million. Current expenses for the collection department are $35,000, bad debt losses are 1.5 percent, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $22,000 per year. The change is expected to increase bad debt losses to 2.5 percent and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $1,625,000 per year.
Should the firm relax collection efforts if the opportunity cost of funds is 16 percent, the variable cost ratio is 75 percent, and taxes are 40 percent?