Question

In: Finance

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 $126,000 in additional credit sales, 9 percent are likely to be uncollectible. The company will also incur $15,900 in additional collection expense. Production and marketing costs represent 70 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 10 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?

Solutions

Expert Solution

a-1) Fast Turnstiles Co.

Added Sales                                                                                       $126,000

Less: Accounts uncollectible (9% of new sales)                       11,340

Annual incremental revenue                                                      114,660

Collection Costs                                                                                   15,900

Production and selling costs (70%*new sales)                        88,200

Income before taxes                                                                          10,560

Taxes (35%)                                                                                              3,696

Incremental income after taxes                                                                      6,864

a-2)

Accounts Receivable Turnover = Sales / Accounts Receivable

Accounts Receivable = Sales / Accounts Receivable Turnover

                                      = $126,000 / 4 = $31,500

Return on incremental investment = net income / accounts receivable

                                                                     = $6,864 / $31,500 = 21.79%

a-3)

Yes. Credit should be extended to these customers because the incremental return of 21.79% is greater than 10%.

b-1) Fast Turnstiles Co.

Added Sales                                                                                       $126,000

Less: Accounts uncollectible (12% of new sales)                     15,120

Annual incremental revenue                                                      110,880

Collection Costs                                                                                   15,900

Production and selling costs (70%*new sales)                        88,200

Income before taxes                                                                            6,780

Taxes (35%)                                                                                              2,373

Incremental income after taxes                                                                      4,407

b-2)

Accounts Receivable Turnover = Sales / Accounts Receivable

Accounts Receivable = Sales / Accounts Receivable Turnover

                                      = $126,000 / 4 = $31,500

Return on incremental investment = net income / accounts receivable

                                                                     = $4,407 / $31,500 = 13.99%

b-3)

Yes. Credit should be extended to these customers because the incremental return of 13.99% is greater than 10%.

c-1)

If receivable turnover drops to 2.0x then in that case the investment in accounts receivable would equal

    $126,000/2.0 = $63,000

Return on incremental investment = 6,864/63,000 = 10.90%

c-2)

Yes. Credit should not be extended because 10.9% is more than the desired 10%.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

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....
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 $486,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $17,800 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....
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 $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers....
Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers....
Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $144,000 in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,000 in additional collection expense. Production and marketing costs represent 71 percent of sales. The firm is in a 35 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a desired return of...
Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers....
Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $522,000 in additional credit sales, 14 percent are likely to be uncollectible. The company will also incur $18,000 in additional collection expenses. Production and marketing costs represent 71 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a desired return of...
Comiskey Fence Co. is evaluating extending credit to a new group of customers. Although these customers...
Comiskey Fence Co. is evaluating extending credit to a new group of customers. Although these customers will provide $324,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will incur $17,000 in additional collection expenses. Production and marketing expenses represent 72 percent of sales. The company has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 16 percent desired return on investment. a-1....
Problem 7-19 Credit policy decision with changing variables [LO7-4] Fast Turnstiles Co. is evaluating the extension...
Problem 7-19 Credit policy decision with changing variables [LO7-4] Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $306,000 in additional credit sales, 11 percent are likely to be uncollectible. The company will also incur $16,900 in additional collection expense. Production and marketing costs represent 71 percent of sales. The firm is in a 30 percent tax bracket and has a receivables turnover of three times. No other asset...
Fast Facts Financial (FFF), Inc. provides credit reports to lending institutions which are evaluating applicants for...
Fast Facts Financial (FFF), Inc. provides credit reports to lending institutions which are evaluating applicants for home mortgages, vehicle, home equity, and other loans. A pressure faced by FFF Inc. is that several competing credit reporting companies are able to provide reports in about the same average amount of time, but are able to promise a lower time than FFF Inc - the reason being that the variation in time required to compile and summarize credit data is smaller than...
Mayfair Co. allows select customers to make purchases on credit. Its other customers can use either...
Mayfair Co. allows select customers to make purchases on credit. Its other customers can use either of two credit cards: Zisa or Access. Zisa deducts a 6.5% service charge for sales on its credit card. Access deducts a 5.5% service charge for sales on its card. Mayfair completes the following transactions in June. June 4 Sold $700 of merchandise on credit (that had cost $350) to Natara Morris terms n/30. 5 Sold $10,000 of merchandise (that had cost $5,000) to...
Mayfair Co. allows select customers to make purchases on credit. Its other customers can use either...
Mayfair Co. allows select customers to make purchases on credit. Its other customers can use either of two credit cards: Zisa or Access. Zisa deducts a 3% service charge for sales on its credit card. Access deducts a 2% service charge for sales on its card. Mayfair completes the following transactions in June. June 4 Sold $650 of merchandise on credit (that had cost $400) to Natara Morris terms n/30. 5 Sold $6,900 of merchandise (that had cost $4,200) to...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT