Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although...

Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $270,000 in additional credit sales, 9 percent are likely to be uncollectible. The company will also incur $16,700 in additional collection expense. Production and marketing costs represent 75 percent of sales. The firm is in a 35 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 8 percent desired return.

a-1. Calculate the incremental income after taxes.

a-2. Calculate the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places.)

a-3. Should Fast Turnstiles Co. extend credit to these customers?

	Yes
	No

b-1. Calculate the incremental income after taxes if 12 percent of the new sales prove to be uncollectible.

b-2. Calculate the return on incremental investment if 12 percent of the new sales prove to be uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

b-3. Should credit be extended if 12 percent of the new sales prove uncollectible?

	Yes
	No

c-1. Calculate the return on incremental investment if the receivables turnover drops to 2.0, and 9 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

c-2. Should credit be extended if the receivables turnover drops to 2.0, and 9 percent of the accounts are uncollectible?

	No
	Yes

Solutions

Expert Solution


a-1	Incremental Income after taxes

	Additional Credit Sales			$270,000
	Less :
	Uncollectible (9%*270000)			24300
	Collection Expense			16700
	Production and marketing costs (75% of 270000)			202500
	Income before tax			$26,500
	Tax @ 35%			$9,275
	Incremental income after tax			$17,225

a-2	Return on incremental investment
	Receivables turnover - 4 times	Credit Sales/Accounts receivable
	Accounts receivable = 270000/4	67500

	Return on Investment	17225/67500	25.52%

a-3	Yes, Fast Turnstiles Co should extend credit to these customers as return on investment is more than the required return

b-1	Additional Credit Sales			$270,000
	Less :
	Uncollectible (12%*270000)			32400
	Collection Expense			16700
	Production and marketing costs (75% of 270000)			202500
	Income before tax			$18,400
	Tax @ 35%			$6,440
	Incremental income after tax			$11,960

b-2	Return on investment	11960/67500	17.72%

b-3	Yes, Fast Turnstiles Co should extend credit to these customers as return on investment is more than the required return

c-1	Receivables turnover - 2 times	Credit Sales/Accounts receivable
	Accounts receivable = 270000/2	135000

	Return on investment	17225/135000	12.76%

c-2	Yes, Fast Turnstiles Co should extend credit to these customers as return on investment is more than the required return

jeff jeffy answered 1 year ago

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