Question

I would like to have this assignment checked for accuracy please. Thank you

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.

1. Compute the incremental income after taxes that would result from these projections:

2. 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…

3. Compute the additional investment in Accounts Receivable
4. Compute the incremental Return on New Investment

5. 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.

Proposal #1
			Dollars
Incremental Sales			$120,000.00
Collection Cost (5% of Incremental Sales)			$6,000.00		120,000.00 X 5% = $6,000.00
Bad Debts (6% of account Receivables)			-$7,200.00		120,000 X 6% = $7200.00
Production and Selling Cist(80% of Incremental Sales)			-$96,000.00		120,000 X 80% = $96000.00
incremental Income Before Taxes			$10,800.00		120,000.00-6000.00-7200.00-96,000 = 10800.00
Taxes@30% of Incremental Income			-$3,240.00		10800.00 X 30% = $3240.00
Incremental Income after Taxes			$7,560.00		Incrremental Income after Taxes

Answer 1

The computation is correct

Proposal #1
			Dollars
Incremental Sales			$120,000.00
Collection Cost			$6,000.00
Bad Debts			$7,200.00
Production and Selling			$96,000.00
incremental Income Before Taxes			$10,800.00
Taxes@30% of Incremental Income			$3,240.00
Incremental Income after Taxes			$7,560.00

WORKINGS