FM27 28 - n What is the incremental after-tax profit...

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Mini Case: 27- 28 n. What is the incremental after-tax profit associated with the change in credit terms? Should the company make the change? (assume a tax rate of 40 percent.) New Old Difference Gross sales $1,000,000 Less discounts 0 Net sales $1,000,000 Production costs 750,000 Profit before credit Costs and taxes $ 250,000 Credit-related costs: Carrying costs 7,890 Bad debt losses 20,000 Profit before taxes $ 222,110 Taxes (40%) 88,844 Net income $ 133,266 Answer: The income statements and differentials under the two credit policies are shown below: New Old Difference Gross sales $1,100,000 $1,000,000 $100,000 Less discounts 13,068 0 13,068 Net sales $1,086,932 $1,000,000 $ 86,932 Production costs 825,000 750,000 75,000 Profit before credit Costs and taxes $ 261,932 $ 250,000 $ 11,932 Credit-related costs: Carrying costs 4,068 7,890 (3,822) Bad debt losses 11,000 20,000 (9,000 ) Profit before taxes $ 246,846 $ 222,110 $ 24,754 Taxes (40%) 98,745 88,844 9,902 Net income $ 148,118 $ 133,266
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