Question
In: Finance
B Excel #1 Proposal #1 would extend trade credit to some customers that previously have been...
B Excel #1
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 $120,000 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 80% of sales. Your firm expects to pay a total of 30% of its income after expenses in taxes. (Show Work)
- Compute the incremental income after taxes that would result from these projections:
- Compute the incremental Return on Sales if these new credit customers are accepted:
If the receivable turnover ratio is expected to be 4 to 1 and no other asset buildup is needed to serve the new customers…
- Compute the additional investment in Accounts Receivable
- Compute the incremental Return on New Investment
- If your company requires a 20% Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers? Explain.
Solutions
Expert Solution
Given:
incremental Sales = $120,000
uncollectibles sales = 6%* sales
Collection cost = 5%*sales
Production and selling cost = 80%*sales
Income tax = 30%
a) Incremental income after tax is calculated as below:
| Incremental Sales | 120000 |
| Less Uncollectible sales of 6% | 7200 |
| Less collection cost | 6000 |
| Less Production and selling cost | 96000 |
| Earning before tax | 10800 |
| Less tax @ 30% | 3240 |
| Net Incremental Income after tax | 7560 |
Incremental Income tax $7560
b) Incremental return on sales = Net Income / Sales
= 7560 / 120000
= 6.30%
c)Receivable turnover ratio = 4:1
Accounts receivables = Sales / Receivable turnover ratio
= 120000 / 4
= $30000
Additional investment in accounts receivables is
$30000
c) Incremental return on investment
Only incremental investment is accounts receivables.
Therefore
Return on investment = Net Income / Accounts receivables
= 7560 / 30000
= 25.20%
d) Yes, trade credit could be given to them as the return on
investment 25.20% is higher than the 20% required rate of
return
jeff jeffy answered 11 months agoRelated Solutions
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are projected to be uncollectible. Additional collection
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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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that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
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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
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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
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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...
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