I would like to have this assignment checked for accuracy please. Thank you Proposal #1 would...

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.

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.

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

Solutions

Expert Solution

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

jeff jeffy answered 10 months ago

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