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Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although...

Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 10 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.)

b-1. Calculate the incremental income after taxes if 15 percent of the new sales prove to be uncollectible​

b-2. Calculate the return on incremental investment if 15 percent of the new sales prove to be uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

c-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

Solutions

Expert Solution

a-1.

Incremental credit sales $180,000
Less: Uncollectible (180,000*12%) 21,600
Less: Production and marketing cost (180,000*72%) 129,600
Less: Additional collection expense 16,200
Incremental income before taxes 12,600
Less: Tax @34% 4,284
Incremental income after taxes $8,316

a-2.

Return on incremental investment = Incremental income / Average Accounts receivables

Average Accounts receivables = Incremental credit sales / Accounts receivable turnover

Average Accounts receivable = $180,000 / 4 = $45,000

Return on incremental investment = $8,316 / 45,000 = 18.48%

b-1.

Incremental credit sales $180,000
Less: Uncollectible (180,000*15%) 27,000
Less: Production and marketing cost (180,000*72%) 129,600
Less: Additional collection expense 16,200
Incremental income before taxes 7,200
Less: Tax @34% 2,448
Incremental income after taxes $4,752

b-2.

Return on incremental investment = Incremental income / Average Accounts receivables

Average Accounts receivables = Incremental credit sales / Accounts receivable turnover

Average Accounts receivable = $180,000 / 4 = $45,000

Return on incremental investment = $4,752 / 45,000 = 10.56%

c-1.

Return on incremental investment = Incremental income / Average Accounts receivables

Average Accounts receivables = Incremental credit sales / Accounts receivable turnover

New accounts receivable turnover = 1.6 Times

Average Accounts receivable = $180,000 / 1.6 = $112,500

Return on incremental investment = $8,316 / 112,500 = 7.39%

ekkarill92 answered 1 year ago
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