Comapny considering a more liberal credit policy to increase sales but expects t
ID: 2701532 • Letter: C
Question
Comapny considering a more liberal credit policy to increase sales but expects that 8% of the new account will be uncollected.Collections cost are 6% of new sales production and selling cost are 79% accounts reciev. turnover is
four times Income tax of 35% increase in sales of 70,000 no other assest buildup required.
a- what are the level of accounts recievable needed to support the this sales expansion
b- What would be the incremental aftertax return on income?
c- Assume he also needs to increase level of inventory to support the 70,000 in sales
should they give more liberal credit?
Explanation / Answer
account recievable = sales/turnover = 70000/4 = 17500
b)
Added Sales..............70,000
Accounts uncollectible (8% of new sales)........................................(5600)
Annual Incremental revenue.........................................64400
Collection costs (6% of new sales.......................(4200)
Production & selling costs (79% of new sales)........................(55300)
Annual income before taxes.....................4900
Taxes (35%).............................(1715)
Incremental Income after taxes...................................3185
c)
inventory = 70000/4 = 17500
Incremental investment:
Inventory 17,500
Accounts receivables 17500
Total incremental investment 35,000
return on icremnatal ivestment = 3185/35000 = 9.1%
No, no nedd to give more liberal credit