Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 32

What-If Analysis As the management accountant for the Tyson Company you have been asked to construct a financial planning model for collection of accounts receivable and then to perform a what-if analysis in terms of the assumption regarding estimated uncollectible accounts. You are provided with the following information:

Collection Pattern for Credit Sales: 75 percent of the company’s credit sales are collected in the month of sale, 20 percent in the month following month of sale, and 5 percent are uncollectible. Credit Sales: January 2010, $100,000; February 2010, $120,000; March 2010, $110,000.

Required

1. What is meant by the term what-if analysis?

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2. Generate a spreadsheet model regarding estimated bad debts expense under the following assumptions regarding the rate of uncollectible accounts: 1 percent, 3 percent, 5 percent (base case), and 8 percent. Prepare an estimate of bad debts expense for each of three months, January through March, and for the quarter as a whole.

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3. What is the value to Tyson Company of creating a model and then performing the what-if analysis described above?

Step 1 of 4

Bad debts are the accounts which are considered as unrecoverable accounts receivables. When the company sells goods on sells, it is quite often seen that the seller gets bankrupt and the amount due from them gets unrecoverable. Such accounts are treated as bad debts.