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Credit Policy Decisions

# Credit Policy Decisions - Assume Collins also needs to...

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Credit Policy Decisions Christy Thornton FIN/200 June 4, 2010 Mernoush Banton 17. Collins Office Supplies is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 78 percent, and accounts receivable turnover is five

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Credit Policy 2 times. Assume income taxes of 30 percent and an increase in sales of \$80,000. No other asset buildup will be required to service the new accounts. a. What is the level of accounts receivable needed to support this sales expansion? \$80,000/5 = \$16,000 b. What would be Collins’s incremental after-tax return on investment? \$4,480/16,000 = 28% c. Should Collins liberalize credit if a 15 percent after-tax return on investment is required?
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Unformatted text preview: Assume Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times. Yes, 28% exceeds 15% which is the required return. d. What would be the total incremental investment in accounts receivable and inventory to support an \$80,000 increase in sales? Investment in inventory = total increment investment inventory \$20,000 Inventory = \$80,000/4 = \$20,000 \$20,000 + \$16,000 = \$36,000 \$4,480/\$36,000 = 12.4% e. Given the income determined in part b and the investment determined in part d, should Collins extend more liberal credit terms? No, because 12.4% is less than the required 15%....
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