In: Accounting
Henderson Office Supply is considering a more liberal credit
policy to increase sales, but expects that 10 percent of the new
accounts will be uncollectible. Collection costs are 5 percent of
new sales, production and selling costs are 79 percent, and the
accounts receivable turnover is five times. Assume income taxes of
30 percent and an increase in sales of $84,000. No other asset
buildup will be required to service the new
accounts.
a. What additional investment in accounts
receivable is needed to support this sales expansion?
b. What would be Henderson’s incremental aftertax
return on investment? (Input your answer as a percent
rounded to 2 decimal places.)
c. Should Henderson liberalize credit if a 16
percent aftertax return on investment is required?
Yes | |
No |
Assume that Henderson also needs to increase its level of inventory
to support new sales and that the inventory turnover is four
times.
d. What would be the total incremental investment
in accounts receivable and inventory needed to support a $84,000
increase in sales?
e. Given the income determined in part b
and the investment determined in part d, should Henderson
extend more liberal credit terms?
Yes | |
No |