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 = $\frac{\text{Annual Credit Sales} \times \text{DSO}}{365}$ - Cost of funds tied up in receivables = $\text{Average accounts receivable} \times \text{Opportunity cost rate}$ - Bad debt losses = $\text{Sales} \times \text{Bad debt loss %}$ - Contribution margin = $\text{Sales} \times (1 - \text{Variable cost ratio})$ - Total cost = Collection expenses + Bad debt losses + Cost of funds 4. **Calculate current situation:** - Average accounts receivable = $\frac{20,00,000 \times 35}{365} = 191,780.82$ - Cost of funds = $191,780.82 \times 0.10 = 19,178.08$ - Bad debt losses = $20,00,000 \times 0.035 = 70,000$ - Collection expenses = 45,000 - Total cost = $45,000 + 70,000 + 19,178.08 = 1,34,178.08$ 5. **Calculate after tightening:** - Average accounts receivable = $\frac{16,00,000 \times 25}{365} = 109,589.04$ - Cost of funds = $109,589.04 \times 0.10 = 10,958.90$ - Bad debt losses = $16,00,000 \times 0.02 = 32,000$ - Collection expenses = 58,000 - Total cost = $58,000 + 32,000 + 10,958.90 = 1,00,958.90$ 6. **Calculate contribution margin difference:** - Current contribution margin = $20,00,000 \times (1 - 0.80) = 4,00,000$ - After tightening contribution margin = $16,00,000 \times (1 - 0.80) = 3,20,000$ - Contribution margin decreases by $4,00,000 - 3,20,000 = 80,000$ 7. **Net effect on profit:** - Savings in costs = $1,34,178.08 - 1,00,958.90 = 33,219.18$ - Loss in contribution margin = 80,000 - Net effect = $33,219.18 - 80,000 = -46,780.82$ 8. **Conclusion:** Since the net effect is negative (-46,780.82), tightening the collection efforts will reduce overall profit. Therefore, Eagle Inc. should not tighten its collection efforts. **Final answer:** Eagle Inc. should not tighten its collection efforts because it results in a net loss of 46,780.82.