solution fini 200 cp - a. Investment in accounts receivable...

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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 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 to support this sales expansion? b. What would be Collin's incremental aftertax return on investment? c. Should Collins liberalize credit if a 15 percent aftertax return on investment is required? Assume that Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times. d. What would be the total incremental investment in accounts receivable and inventory to support a $80,000 increase in sales? e. Given the income determined in part b and the investment determined in part d , should Collins extend more liberal credit terms?
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Unformatted text preview: a. Investment in accounts receivable = 000 , 16 $ 5 000 , 80 $ = b. Added sales. ............................................... $ 80,000 Accounts uncollectible (9% of new sales) 7,200 Annual incremental revenue. ..................... $ 72,800 Collection costs (5% of new sales). ........... 4,000 Production and selling costs (78% of new sales). ................................. 62,400 Annual income before taxes. ..................... $ 6,400 Taxes (30%). ............................................. 1,920 Incremental income after taxes. ................. $ 4,480 Return on incremental investment = $4,480/$16,000 = 28% c. Yes! 28% exceeds the required return of 15%. d. Investment in inventory = 000 , 20 $ 4 000 , 80 $ = Total incremental investment Inventory $20,000 Accounts receivable 16,000 Incremental investment $36,000 $4,480/$36,000 = 12.44% return on investment e. No! 12.44% is less than the required return of 15%....
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solution fini 200 cp - a. Investment in accounts receivable...

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