CheckPoint Credit Policy Decisions

# CheckPoint Credit Policy Decisions - 72,800-4,000=68,800...

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CHECKPOINT: CREDIT POLICY DECISIONS 1 CheckPoint: Credit Policy Decisions Holly Sestito FIN/ 200 June 10, 2011 Noah Plante

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CHECKPOINT: CREDIT POLICY DECISIONS 2 CheckPoint: Credit Policy Decisions 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? 80,000/5= 16,000 b. What would be Collins’s incremental after tax return on investment? 80,000*.09=7,200 80,000*.05=4,000 80,000*.78= 62,400 80,000-7,200=72,800
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Unformatted text preview: 72,800-4,000=68,800 68,800-62,400=6,400 6,400*.30=1,920 6,400-1,920=4,480 4,480/16,000= 28% c. Should Collins liberalize credit if a 15 percent after tax return on investment is required? Yes because the increase is 28% and it is more than the required 15% Assume Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times. CHECKPOINT: CREDIT POLICY DECISIONS 3 d. What would be the total incremental investment in accounts receivable and inventory to support an \$80,000 increase in sales? 80,000/4= 20,000 20,000+16,000= 36,000 4,480/36,000= 12.44% e. Given the income determined in part b and the investment determined in part d, should Collins extend more liberal credit terms? No, they have a required 15% and this would only give them 12.44% and that would be less....
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CheckPoint Credit Policy Decisions - 72,800-4,000=68,800...

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