Question

Randy Company is thinking about extending trade credit to new customers. This will increase the annual sales by $400,000 if credit is extended to these customers. Of the new accounts receivable related to these sales, 10% will be uncollectible. Additional collection costs will be 8% of sales. Besides, production and selling costs will be 85% of sales. The company is in a 40% tax bracket.

16. What is the amount of additional collection costs? *

a-$32,000

b- $40,000

c- $340,000

d- $400,000

e- None of the above

17. What is the profit on the new sales? *

a- $7,200

b- $12,000

c- $30,000

d- $400,000

e- None of the above

18. What is the percentage return on the new sales? *

a- 1.80%

b- 3%

c- 7.50%

d- 10%

e- None of the above

19. What is the amount of the new investment in accounts receivable if the accounts receivable are turned over 5 times a year? *

a- $40,000

b- $68,000

c- $80,000

d- $400,000

e- None of the above

20. What is the return on investment, assuming that the only new investment will be in accounts receivable? *

a- 9%

b- 10%

c- 15%

d- 30%

e- None of the above

Answer 1