Week 6 Checkpoint-Credit Policy Decisions

# Week 6 Checkpoint-Credit Policy Decisions - \$ 4,480 Return...

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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 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? b. What would be Collins’s incremental after tax return on investment? Additional sales \$80,000 Accounts uncollectable(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 Annual incremental income after taxes

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Unformatted text preview: \$ 4,480 Return on incremental investment= c. Should Collins liberalize credit if a 15 percent after tax return on investment is required? Yes, because 28% is more than the required return of 15%. Assume 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 an \$80,000 increase in sales? Investment in inventory Total incremental investment: Inventory \$20,000 Accounts Receivable 16,000 Incremental Investment \$36,000 Return on Investment e. Given the income determined in part b and the investment determined in part d, should Collins extend more liberal credit terms? No, 12.44% is lower than the required return of 15%....
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## This note was uploaded on 11/09/2010 for the course FIN 200 FIN 200 taught by Professor Smith during the Spring '10 term at University of Phoenix.

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Week 6 Checkpoint-Credit Policy Decisions - \$ 4,480 Return...

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