Opportunity Cost in the Evaluation of Investment in Accounts Receivable

Abstract

T he currently used method of evaluating investment in accounts receivable emphasizes that the acceptance of a proposed change in credit policy is dependent on the marginal profitability being greater than or equal to the associated marginal opportunity cost [2; 4, Chap. 6; 7; 11, Chap. 18]. The general notion is that the demand for a firm's product is elastic with respect to credit policy changes and that the policy decision involves a tradeoff between profits on the marginal credit sales and the marginal costs. Costs include costs of goods sold, cost of additional capital committed to accounts receivable (opportunity cost), additional bookkeeping costs, collection costs, and bad-debt losses. As the analysis is normally conducted in the short-run context, the arbitrary allocation of fixed costs is excluded.