1. **State the problem:** Eagle Inc. wants to decide whether to tighten its collection efforts. We need to analyze the financial impact considering changes in Days Sales Outstanding (DSO), sales, bad debt losses, collection expenses, and opportunity cost. 2. **Given data:** - Current annual credit sales = 20,00,000 - Current collection expenses = 45,000 - Current bad debt losses = 3.5% of sales - Current DSO = 35 days - After tightening: - DSO = 25 days - Sales = 16,00,000 - Bad debt losses = 2% of sales - Collection expenses = 58,000 - Opportunity cost of funds = 10% - Variable cost ratio = 80% 3. **Formulas and concepts:** - Average accounts receivable = $\frac{\text{Annual Credit Sales} \times \text{DSO}}{365}$ - Opportunity cost = Average accounts receivable $\times$ Opportunity cost rate - Bad debt loss = Sales $\times$ Bad debt loss rate - Contribution margin = Sales $\times$ (1 - Variable cost ratio) - Net benefit = Change in contribution margin - Change in bad debt losses - Change in collection expenses - Change in opportunity cost 4. **Calculate current values:** - Current average accounts receivable = $\frac{20,00,000 \times 35}{365} = 1,91,780.82$ - Current opportunity cost = $1,91,780.82 \times 0.10 = 19,178.08$ - Current bad debt losses = $20,00,000 \times 0.035 = 70,000$ - Current contribution margin = $20,00,000 \times (1 - 0.80) = 4,00,000$ 5. **Calculate values after tightening:** - New average accounts receivable = $\frac{16,00,000 \times 25}{365} = 1,09,589.04$ - New opportunity cost = $1,09,589.04 \times 0.10 = 10,958.90$ - New bad debt losses = $16,00,000 \times 0.02 = 32,000$ - New contribution margin = $16,00,000 \times (1 - 0.80) = 3,20,000$ 6. **Calculate changes:** - Change in contribution margin = $3,20,000 - 4,00,000 = -80,000$ - Change in bad debt losses = $32,000 - 70,000 = -38,000$ - Change in collection expenses = $58,000 - 45,000 = 13,000$ - Change in opportunity cost = $10,958.90 - 19,178.08 = -8,219.18$ 7. **Calculate net benefit:** $$\text{Net benefit} = (-80,000) + 38,000 - 13,000 + 8,219.18 = -46,780.82$$ 8. **Interpretation:** The net benefit is negative, meaning tightening the collection efforts results in a net loss of 46,780.82. **Final answer:** Eagle Inc. should not tighten its collection efforts as it leads to a net loss of 46,780.82.