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Unformatted text preview: = (additional accounts receivable + additional inventory) x (pre-tax required rate of return) = (666666.67 + 50,000) x (0.15) = (716666.67) x (0.15) = 107500.0000005 = 107500 (by approximating 107500.0000005) Step3 Estimate the change in the cost of the cash discount (if the change in the cash discount is in tact). = (new level of sales x new percent cash discount x percent customers taking discount) – (original level of sales x original percent cash discount x original percent taking discount) (This step is not applicable in this problem) Step 4 Compare the incremental revenues with the incremental costs. Net change in pre-tax profits = change in profits – (cost of new investment in accounts receivable and inventory + cost of change in cash discount) = Step 1 – (Step 2 + Step 3) = Step 1 – Step 2 (as Step 3 is not applicable in this problem) = 120,000 – 107,500 = 12,500...
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