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9.Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would...

9.Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $300,000 if credit is extended to these new customers. Of the new accounts receivable generated, 6 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 78 percent of sales. The firm is in the 25 percent tax bracket.

a. Compute the incremental income after taxes.
Incremental income after taxes

b. What will Johnson’s incremental return on sales be if these new credit customers are accepted? (Input your answer as a percent rounded to 2 decimal places.)
Incremental return on sales %

c. If the accounts receivable turnover ratio is 3 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Incremental return on new average investment %

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Expert Solution

Compute the incremental income after taxes.

Additional sales                                                                $300000

Uncollectible (6% of sales) (300000 x6%)                          ($18000)

Annual incremental revenue                                             $282000

Collection costs (5% of sales) (300000 X 5%)                 ($15000)

Production and selling costs (78% of new sales)            ($234000)

Annual income before taxes                                         $33000

Taxes (25%)                                                                 ($8250)

Incremental income after taxes                                 $24750

What will Johnson’s incremental return on sales be if these new credit customers are accepted?

Incremental return on sale = Incremental income/Incremental sales

$24750/$300000 X 100 = 8.25%

If the accounts receivable turnover ratio is 3 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be?

Receivable turnover = Sales/Receivables = 3x

So, Receivables= Sales/Receivable turnover

           ($300000/3) =$100000

Incremental return on new average investment = Incremental income/ Receivables = $24750/$100000 =24.75%

ekkarill92 answered 3 hours ago
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