Question

Kennedy Company is thinking about extending trade credit to new customers. This will increase the annual sales by $510,000 if credit is extended to these customers. Of the new accounts receivable related to these sales, 11% will be uncollectible. Additional collection costs will be 8% of sales. Besides, production and selling costs will be 65% of sales. The company is in a 30% tax bracket.

11. What is the amount of additional collection costs? $40,800 $56,100 $331,500 $510,000 None of the above

12. What is the profit on the new sales? $24,480 $57,120 $81,600 $510,000 None of the above

13. What is the percentage return on the new sales? 4.80% 8% 11.20% 16% None of the above

14. What is the amount of the new investment in accounts receivable if the accounts receivable are turned over 3 times a year? $110,500 $170,000 $171,360 $331,500 None of the above

15. What is the return on investment, assuming that the only new investment will be in accounts receivable? 8% 14.40% 33.60% 51.69% None of the above

Answer 1

Solution

Incremental Income Statement
Sales Increase	$510,000
Collections ( $510000 * 89%)		$453,900
Less - Cost of Collections (8% of $510000)		$40,800
Less - Production and Selling Cost (65% of $510000)		$331,500
Net Income		$81,600
Tax @ 30%		$24,480
Incremental Income after tax		$57,120

11	Additional Collection Cost
	$40800 ( From statement above)
12	Profit on new Sales
	$57120 ( From Statement above)
13	Percentage Return on New Sales
	Proft/ Incremental Sales * 100
	$57120/$510000
	11.20%
14	New Invesment in Account recievable
	Incremental Sales/ Account Recievable Turnover
	$510000/ 3
	$170,000
15	Return on Investment
	$57120/ $170000
	33.60%

If you have any query, feel free to ask and if you are satisfied with the solution then please give me positive rating, it would really help me