Question
In: Finance
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would...
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $190,000 if credit were extended to these new customers. Of the new accounts receivable generated, 7 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 30 percent tax bracket.
a. Compute the 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.)
c. If the accounts receivable turnover ratio is 5 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.)
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Proposal #2 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks.
You have been asked to assess the expected financial impact of
each of the following proposals to improve the profitability of
credit sales made by your company. Each proposal is independent of
the other.Proposal #2 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $150,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 10% are projected...
Bilbo Bags & Things makes fashionable handbags. They are considering extending trade credit to some customers...
Bilbo Bags & Things makes fashionable handbags. They are
considering extending trade credit to some customers previously
considered poor risks. The following estimations are made for this
new customer base:
Sales would increase by $100,000 if credit is extended to these
new customers.
Production and selling costs will be 80% of sales.
All sales will be on credit, and 10% of them will prove to be
uncollectible.
Additional collection costs will be 5% of sales, and
Customer Service costs will...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to
increase by $200,000 per year if credit is extended to these new
customers. Of the new accounts receivable generated, 6%
are projected to be uncollectible. Additional collection
costs are projected to be 5% of incremental sales, and production
and selling costs are projected to be 78% of sales. Your
firm expects to pay a total of 30% of its...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers that
previously have been denied credit because they were considered
poor risks. Sales are projected to increase by $150,000 per year if
credit is extended to these new customers. Of the new accounts
receivable generated, 7% are projected to be uncollectible.
Additional collection costs are projected to be 3% of incremental
sales (whether they actually end up collected or not), and
production and selling costs are projected to be 80% of...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers that
previously have been denied credit because they were considered
poor risks. Sales are projected to increase by $150,000 per year if
credit is extended to these new customers. Of the new accounts
receivable generated, 7% are projected to be uncollectible.
Additional collection costs are projected to be 3% of incremental
sales (whether they actually end up collected or not), and
production and selling costs are projected to be 80% of...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $240,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 2%
of incremental sales (whether they actually end up collected or
not), and production and selling costs are projected to be 78% of...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $150,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 7% are projected to be
uncollectible. Additional collection costs are projected to be 3%
of incremental sales (whether they actually end up collected or
not), and production and selling costs are projected to be 80% of...
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