M8-1 Evaluating the Decision to Extend Credit [LO 8-1 Nutty Productions Inc. gen
ID: 2577444 • Letter: M
Question
M8-1 Evaluating the Decision to Extend Credit [LO 8-1 Nutty Productions Inc. generated service revenue of $48,000 and income from operations of $19,000. The company estimates that, had it extended credit it would have instead generated $87,000 of service revenue, but it would have incurred $34,000 of additional expenses for wages and bad debts. 1-a. Using these estimates, calculate the amount by which Income from Operations would increase (decrease) Income from Operations by 1-b. Should the company extend credit? Yes NoExplanation / Answer
1-a
Service revenue = 48,000
Income from operations = 19,000
Expenses = Service revenue - Income from operations
= 48,000 - 19,000 = 29,000
Service revenue after extended credit = 87,000
Additional expenses = 34,000
Income from operations after extended credit = Service revenue after extended credit - Expenses - Additional expenses
= 87,000 - 34,000 - 29,000
= 24,000
Income from Operations Increases by 5,000 (24,000 - 19,000).
1-b
Income from operations as a percentage of service revenue = 19,000 / 48,000 = 39.48%
Income from operations as a percentage of service revenue afer extended credit = 24,000 / 87,000 = 27.59%
As the Income from operations as a percentage of service revenue decreased, the company should not extend the credit.
NO.
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