Question

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 buildup will be required to service the new customers. The firm has a 12 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 14 percent of the new sales prove to be uncollectible. b-2. Calculate the return on incremental investment if 14 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 14 percent of the new sales prove uncollectible? Yes No c-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 11 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 1.6, and 11 percent of the accounts are uncollectible? No Yes

Answer 1